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The Impact of Trade Integration and Competition on Real and Nominal Price Rigidities: Insights from a New-Keynesian DSGE Model

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  • Anna Watson

Abstract

The paper examines the impact of trade integration and product market competition on firms' price setting behaviour and the degree of price stickiness. The analysis is based on a New-Keynesian open-economy DSGE model with variable desired mark-ups and Calvo price setting in which the frequency of price adjustment is endogenised. The study demonstrates that trade integration and the resulting changes in competition affect the degree of strategic complementarity in firms' price setting decisions and the frequency with which firms change their prices, which determine the degree of real and nominal price rigidities respectively. The micro-founded macroeconomic model constructed explains the positive relationship between competition and the frequency of price adjustment evident from empirical studies and surveys of firms' price setting behaviour. By accounting for the impact of competition on firms' pricing policies, the study also provides new insights into the effects of global economic integration on the Phillips Curve and inflation dynamics.

Suggested Citation

  • Anna Watson, 2010. "The Impact of Trade Integration and Competition on Real and Nominal Price Rigidities: Insights from a New-Keynesian DSGE Model," DEGIT Conference Papers c015_061, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c015_061
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    File URL: http://degit.sam.sdu.dk/papers/degit_15/c015_061.pdf
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    More about this item

    Keywords

    Competition; Nominal and Real Price Rigidities; Frequency of Price Adjustment; Globalisation; Phillips Curve;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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