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Learning-by-doing and Endogenous Price-level Inertia

  • Alok Johri

This paper presents a DGE model in which aggregate price level inertia is generated endogenously by the optimizing behaviour of price setting firms. All the usual sources of inertia are absent here ie., all firms are simultaneously free to change their price once every period and face no adjustment costs in doing so. Despite this, the model generates persistent movements in aggregate output and in\u2021ation in response to a nominal shock. This occurs because firms temper their desire to raise prices after a positive money growth shock in order to learn and lower future costs.

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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2005-02.pdf
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Paper provided by McMaster University in its series Department of Economics Working Papers with number 2005-02.

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Length: 21 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:mcm:deptwp:2005-02
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  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
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  3. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," NBER Working Papers 7869, National Bureau of Economic Research, Inc.
  4. Yongsung Chang & Joao Gomes & Frank Schorfheide, 2002. "Learning by Doing as a Propagation Mechanism," Macroeconomics 0204002, EconWPA.
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  7. Cook, David, 1999. "Real Propagation of Monetary Shocks: Dynamic Complementarities and Capital Utilization," Macroeconomic Dynamics, Cambridge University Press, vol. 3(03), pages 368-383, September.
  8. Jang-Ok Cho & Thomas F. Cooley & Louis Phaneuf, 1997. "The Welfare Cost of Nominal Wage Contracting," Review of Economic Studies, Oxford University Press, vol. 64(3), pages 465-484.
  9. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  10. Rebecca Achee Thornton & Peter Thompson, 2001. "Learning from Experience and Learning from Others: An Exploration of Learning and Spillovers in Wartime Shipbuilding," American Economic Review, American Economic Association, vol. 91(5), pages 1350-1368, December.
  11. Sherwin Rosen, 1972. "Learning by Experience as Joint Production," The Quarterly Journal of Economics, Oxford University Press, vol. 86(3), pages 366-382.
  12. King, Robert G & Watson, Mark W, 1996. "Money, Prices, Interest Rates and the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 35-53, February.
  13. Bergin, Paul R. & Feenstra, Robert C., 2000. "Staggered price setting, translog preferences, and endogenous persistence," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 657-680, June.
  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  15. Cooper, Russell & Johri, Alok, 2002. "Learning-by-doing and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1539-1566, November.
  16. Cooper, Russell W. & Johri, Alok, 1997. "Dynamic complementarities: A quantitative analysis," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 97-119, September.
  17. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  18. Stokey, Nancy L, 1988. "Learning by Doing and the Introduction of New Goods," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 701-17, August.
  19. Irwin, Douglas A & Klenow, Peter J, 1994. "Learning-by-Doing Spillovers in the Semiconductor Industry," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1200-1227, December.
  20. Huang, Kevin X. D. & Liu, Zheng, 2001. "Production chains and general equilibrium aggregate dynamics," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 437-462, October.
  21. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
  22. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 303-322, July.
  23. Andrew Atkeson & Patrick J. Kehoe, 2002. "Measuring Organization Capital," NBER Working Papers 8722, National Bureau of Economic Research, Inc.
  24. Alok Johri and Marc-André Letendre, 2006. "What do “residuals” from first-order conditions reveal about DGE models?," Department of Economics Working Papers 2006-01, McMaster University.
  25. C. Lanier Benkard, 2000. "Learning and Forgetting: The Dynamics of Aircraft Production," American Economic Review, American Economic Association, vol. 90(4), pages 1034-1054, September.
  26. repec:cup:macdyn:v:3:y:1999:i:3:p:368-83 is not listed on IDEAS
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