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Staggered price setting and real rigidities

Author Info

  • Michael T. Kiley

Abstract

This paper emphasizes the notion that model features that contribute to endogenous price rigidity under staggered price setting lower the elasticity of marginal cost with respect to output, and these same model features tend to generate equilibrium indeterminacy, or "sunspot fluctuations", under price flexibility. Using this insight, staggered price setting is shown to imply persistent output responses to monetary shocks for certain parameterizations of one- and two-sector models with small increasing returns or countercyclical markups, and other model features that would contribute to persistence are discussed.

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File URL: http://www.federalreserve.gov/pubs/feds/1997/199746/199746abs.html
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File URL: http://www.federalreserve.gov/pubs/feds/1997/199746/199746pap.pdf
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1997-46.

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Date of creation: 1997
Date of revision:
Handle: RePEc:fip:fedgfe:1997-46
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Keywords: Prices;

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  18. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  19. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
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  25. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  26. Robert G. King & Alexander L. Wolman, 1996. "Inflation targeting in a St. Louis model of the 21st century," Review, Federal Reserve Bank of St. Louis, issue May, pages 83-107.
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