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Optimally Sticky Prices

Listed author(s):
  • William (Bill) Zame

    (University of California, Los Angeles)

  • Jean-Paul L'Huillier

    (Einaudi Institute for Economics and Finance)

We propose a microfoundation for sticky prices. We consider a an environment in which a monopolistic firm has better information than its consumers about the nominal aggregate state. We show that, when many consumers are uninformed (and for some ranges of parameters), it is optimal for the firm to offer contracts/prices that do not depend on the state of the world; i.e. optimal contracts/prices are sticky. We establish this result first in a general mechanism design framework that allows for non-linear pricing and screening, and then show implementation under both contract-setting and price-setting. A virtue of our microfoundation is that it is compatible with a dynamic general equilibrium model with money. We analyze whether money is neutral in this framework, and discuss the implications of this microfounded friction for welfare.

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File URL: https://economicdynamics.org/meetpapers/2015/paper_621.pdf
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Paper provided by Society for Economic Dynamics in its series 2015 Meeting Papers with number 621.

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Date of creation: 2015
Handle: RePEc:red:sed015:621
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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