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Endogenous Time-Dependent Rules and Inflation Inertia

  • Marco Bonomo

    (Graduate School of Economics, Getulio Vargas Foundation)

  • Carlos Carvalho

    (Princeton University)

In this paper we endogenize fixed price time-dependent rules to examine the output effects of monetary disinflation. We derive the optimal rules in and out of inflationary steady states, and develop a methodology to aggregate individual pricing rules which vary through time. Because of strategic complementarities we have to solve both problems simultaneously. This allows us to reassess the output costs of monetary disinflations, including aspects such as the roles of the initial level of inflation, and of the degree of strategic complementarity in price. Finally, we relax the strict assumption of pure time-dependent rules by allowing price setters to reevaluate their rules at the time disinflation is announced.

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File URL: http://128.118.178.162/eps/mac/papers/0402/0402005.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0402005.

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Date of creation: 03 Feb 2004
Date of revision: 19 May 2005
Handle: RePEc:wpa:wuwpma:0402005
Note: Type of Document - pdf
Contact details of provider: Web page: http://128.118.178.162

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  1. Peter N. Ireland, 1997. "Stopping inflations, big and small," Proceedings, Federal Reserve Bank of Cleveland, pages 759-782.
  2. Marco Bonomo & Carlos Viana de Carvalho, 2005. "Endogenous Time-Dependent Rules and the Costs of Disinflation with Imperfect Credibility," Macroeconomics 0509004, EconWPA.
  3. BONOMO, Marco & GARCIA, René, 1997. "The Macroeconomic Effects of Infrequent Information with Adjustment Costs," Cahiers de recherche 9716, Universite de Montreal, Departement de sciences economiques.
  4. Mark J. Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 514-533, May.
  5. Andrew Caplin & John Leahy, 1997. "Aggregation and Optimization with State-Dependent Pricing," Econometrica, Econometric Society, vol. 65(3), pages 601-626, May.
  6. repec:nbr:nberre:0126 is not listed on IDEAS
  7. Laurence Ball, 1992. "Disinflation With Imperfect Credibility," NBER Working Papers 3983, National Bureau of Economic Research, Inc.
  8. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September.
  9. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  10. Almeida, Heitor & Bonomo, Marco, 2002. "Optimal state-dependent rules, credibility, and inflation inertia," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1317-1336, October.
  11. Laurence Ball & David Romer, 1987. "The Equilibrium and Optimal Timing of Price Changes," NBER Working Papers 2432, National Bureau of Economic Research, Inc.
  12. 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.
  13. 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.
  14. Alan S. Blinder, 1991. "Why are Prices Sticky? Preliminary Results from an Interview Study," NBER Working Papers 3646, National Bureau of Economic Research, Inc.
  15. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  16. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  17. Sheshinski, Eytan & Weiss, Yoram, 1983. "Optimum Pricing Policy under Stochastic Inflation," Review of Economic Studies, Wiley Blackwell, vol. 50(3), pages 513-29, July.
  18. 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, MIT Press, vol. 114(2), pages 655-690, May.
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