Ambiguity and macroeconomics:a rationale for price stickiness
This paper deals with the emergence of price stickiness, that is nominal price elasticity below one, in the wake of nominal shocks. The setting of analysis is a general equilibrium model with both ambiguity and rational expectations. Ambiguity and macroeconomics are linked exploiting a micro-founded framework. Ambiguity concerns the lack of knowledge of firms about the relationship between changes in the aggregated stock of money and in the money distribution across heterogeneous consumers in the economy. Ambiguity is represented through a multiple priors approach. It is shown that price stickiness can emerge even if a change in the money supply level does not alter the distribution of money across consumers (uniform monetary policy). The key assumption made in the paper is that attitude towards ambiguity of firms is asymmetric: ambiguity aversion towards uncertain positive outcomes (gains) and ambiguity seeking towards negative outcomes (losses). By focusing on the dynamics of beliefs following a change in the stock of money that does not alter the money distribution, it is shown that money neutrality remains true in the long run
|Date of creation:||Jun 2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.deps.unisi.it/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Wakker, Peter & Tversky, Amos, 1993. " An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 147-75, October.
- Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
- Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
- Han Bleichrodt & Jose Luis Pinto & Peter P. Wakker, 2001. "Making Descriptive Use of Prospect Theory to Improve the Prescriptive Use of Expected Utility," Management Science, INFORMS, vol. 47(11), pages 1498-1514, November.
- Einhorn, Hillel J & Hogarth, Robin M, 1986. "Decision Making under Ambiguity," The Journal of Business, University of Chicago Press, vol. 59(4), pages S225-50, October.
- Chateauneuf, A. & Wakker, P., 1998.
"An Axiomatization of Cumulative Prospect Theory for Decision Under Risk,"
Papiers d'Economie MathÃ©matique et Applications
98.51, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
- Chateauneuf, Alain & Wakker, Peter, 1999. "An Axiomatization of Cumulative Prospect Theory for Decision under Risk," Journal of Risk and Uncertainty, Springer, vol. 18(2), pages 137-45, August.
- Michael Kilka & Martin Weber, 2001.
"What Determines the Shape of the Probability Weighting Function Under Uncertainty?,"
INFORMS, vol. 47(12), pages 1712-1726, December.
- Kilka, Michael & Weber, Martin, 1998. "What Determines the Shape of the Probability Weighting Function under Uncertainty?," Sonderforschungsbereich 504 Publications 98-11, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Larry G. Epstein & Martin Schneider, 2001.
RCER Working Papers
485, University of Rochester - Center for Economic Research (RCER).
- Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
- Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 16(1), pages 65-88, February.
- Farmer, Roger E. A., 1992. "Nominal price stickiness as a rational expectations equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 16(2), pages 317-337, April.
- repec:tpr:qjecon:v:100:y:1985:i:5:p:823-38 is not listed on IDEAS
- Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
- Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- repec:tpr:qjecon:v:103:y:1988:i:3:p:441-63 is not listed on IDEAS
- Gilboa Itzhak & Schmeidler David, 1993.
"Updating Ambiguous Beliefs,"
Journal of Economic Theory,
Elsevier, vol. 59(1), pages 33-49, February.
- Itzhak Gilboa & David Schmeidler, 1989.
"Maxmin Expected Utility with Non-Unique Prior,"
When requesting a correction, please mention this item's handle: RePEc:usi:wpaper:428. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fabrizio Becatti)
If references are entirely missing, you can add them using this form.