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Delivering Endogenous Inertia in Prices and Output

  • Alok Johri

This paper presents a DGE model in which aggregate price level inertia is generated endogenously by the optimizing behaviour of price setting ?rms. All the usual sources of inertia are absent here ie., all fi?rms 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?ation in response to a nominal shock. Two modi?cations of a standard one-quarter pre-set price model deliver these results: learning-by-doing and habit formation in leisure.

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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2007-04.pdf
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Paper provided by McMaster University in its series Department of Economics Working Papers with number 2007-04.

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Length: 38 pages
Date of creation: Aug 2007
Date of revision:
Handle: RePEc:mcm:deptwp:2007-04
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