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A Dynamic Economy with Costly Price Adjustment

This paper studies a general-equilibrium model of a dynamic economy with menu costs. Each firm's productivity is exposed to idiosyncratic and aggregate productivity shocks around a trend, and the money supply to monetary shocks around a trend. All consumption, pricing, and production decisions are based on optimizing behavior. There exists a staggered Markov perfect equilibrium with prices determined by a two-sided (s,S) markup strategy. The paper analyzes the optimal markup strategy and investigates the dynamics of the price index and the aggregate output. The welfare consequences of the uncertain aggregate productivity and money supply are also examined. Ce papier étudie un modèle d'équilibre général d'une économie dynamique avec coûts de menu. La productivité de chaque firme est sujette à des chocs individuels et agrégés autour d'une tendance, ainsi que l'offre de monnaie autour d'une tendance. Toutes les décisions de consommation, de détermination des prix et de production sont basées sur un comportement optimisateur. Il existe un équilibre échelonné parfait de Markov avec des prix déterminés par une stratégie (s,S) de marge ajoutée bidirectionnelle. Le papier analyse la stratégie de marge ajoutée optimale et étudie les dynamiques de l'indice des prix et de la production agrégée. Les conséquences pour le bien-être de l'incertitude sur la productivité agrégée et de l'offre de monnaie sont également examinées.

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File URL: http://www.unites.uqam.ca/eco/CREFE/cahiers/cah83.ps
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File URL: http://www.unites.uqam.ca/eco/CREFE/cahiers/cah83.pdf
File Function: Main text (with figures)
Download Restriction: no

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 83.

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Length: 39 pages (+ 2 pages of figures)
Date of creation: Dec 1998
Date of revision:
Handle: RePEc:cre:crefwp:83
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  1. Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 2005. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," Macroeconomics 0505012, EconWPA.
  2. George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 823-838.
  3. Caballero, Ricardo J & Engel, Eduardo M R A, 1991. "Dynamic (S, s) Economies," Econometrica, Econometric Society, vol. 59(6), pages 1659-86, November.
  4. Danziger, Leif, 1984. "Stochastic Inflation and the Optimal Policy of Price Adjustment," Economic Inquiry, Western Economic Association International, vol. 22(1), pages 98-108, January.
  5. Peter A. Diamond, 1993. "Search, Sticky Prices, and Inflation," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 53-68.
  6. Andrew Caplin & John Leahy, 1991. "State-Dependent Pricing and the Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 683-708.
  7. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
  8. Danziger, Leif, 1983. "Price Adjustments with Stochastic Inflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 699-707, October.
  9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  10. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  11. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  12. Laurence M. Ball & David Romer, 1987. "Are Prices Too Sticky?," NBER Working Papers 2171, National Bureau of Economic Research, Inc.
  13. Roland Benabou, 1988. "Search, Price Setting and Inflation," Review of Economic Studies, Oxford University Press, vol. 55(3), pages 353-376.
  14. Parkin, Michael, 1986. "The Output-Inflation Trade-off When Prices Are Costly to Change," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 200-224, February.
  15. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
  16. Avinash Dixit, 1991. "Analytical Approximations in Models of Hysteresis," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 141-151.
  17. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  18. Eytan Sheshinski & Yoram Weiss, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 44(2), pages 287-303.
  19. Rotemberg, Julio J., 1996. "Prices, output, and hours: An empirical analysis based on a sticky price model," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 505-533, June.
  20. Cooley, T.F. & Ohanian, L.E., 1989. "The Cyclical Behavior Of Prices," RCER Working Papers 188, University of Rochester - Center for Economic Research (RCER).
  21. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
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