On Inflation and Output with CostlyPrice Changes: A Simple Unifying Result
We analyze the effect of inflation on the average output of monopolistic firms facing a small fixed cost of changing nominal prices. Using Taylor expansions, we derive a general closed-form solution for the slope of the long-run Phillips curve. This very simple, unifying formula allows us to evaluate and clarify the role of three key factors: the asymmetry of the profit function, the convexity of the demand function, and the discount rate. These partial equilibrium effects remain important components of any general equilibrium model with (s,S) pricing.
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|Date of creation:||1991|
|Date of revision:|
|Contact details of provider:|| Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA|
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Fax: (617) 253-1330
Web page: http://econ-www.mit.edu/
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References listed on IDEAS
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- Roland Benabou, 1988. "Search, Price Setting and Inflation," Review of Economic Studies, Oxford University Press, vol. 55(3), pages 353-376.
- Eytan Sheshinski & Yoram Weiss, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 44(2), pages 287-303.
- Roland Benabou, 1992. "Inflation and Efficiency in Search Markets," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 299-329.
- Konieczny, Jerzy D, 1990. "Inflation, Output and Labour Productivity When Prices Are Changed Infrequently," Economica, London School of Economics and Political Science, vol. 57(226), pages 201-18, May.
- Timur Kuran, 1986. "Price Adjustment Costs, Anticipated Inflation, and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 407-418.
- Peter A. Diamond, 1993.
"Search, Sticky Prices, and Inflation,"
Review of Economic Studies,
Oxford University Press, vol. 60(1), pages 53-68.
- Rotemberg, Julio J, 1983. "Aggregate Consequences of Fixed Costs of Price Adjustment [Sticky Prices and Disequilibrium Adjustment in a Rational Model of the Inflationary Process]," American Economic Review, American Economic Association, vol. 73(3), pages 433-36, June.
- Mussa, Michael, 1981. "Sticky Prices and Disequilibrium Adjustment in a Rational Model of the Inflationary Process," American Economic Review, American Economic Association, vol. 71(5), pages 1020-27, December.
- Danziger, Leif, 1988. "Costs of Price Adjustment and the Welfare Economics of Inflation and Disinflation," American Economic Review, American Economic Association, vol. 78(4), pages 633-46, September.
- Avinash Dixit, 1991. "Analytical Approximations in Models of Hysteresis," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 141-151.
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