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Inflation and Output Dynamics with State-Dependent Frequency of Price Changes

  • Kolver Hernandez

    (Boston College)

This paper extends Calvo's (1983) time-dependent pricing model to incorporate state-dependent features in pricing, while preserving tractability. The pricing scheme delivers a generalized New Keynesian Phillips curve with an explicit role for the frequency of price revisions. The novel feature shows that inflation responds to movements of relative prices and to endogenous fluctuations in the average frequency of price adjustment. The model offers, therefore, a microfounded rationale for systematic deviations in the inflation- marginal cost relation predicted by the new Keynesian Phillips curve. As a byproduct, the model determines endogenously the short-run slope of the Phillips curve. Simulations predict weaker responses of output and stronger responses of inflation to technology, preference and monetary shocks than those of a close time-dependent model.

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File URL: http://128.118.178.162/eps/mac/papers/0411/0411020.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0411020.

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Date of creation: 28 Nov 2004
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Handle: RePEc:wpa:wuwpma:0411020
Note: Type of Document - pdf
Contact details of provider: Web page: http://128.118.178.162

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  1. 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.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Staff Report 227, Federal Reserve Bank of Minneapolis.
  3. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  4. Burstein, Ariel T., 2006. "Inflation and output dynamics with state-dependent pricing decisions," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1235-1257, October.
  5. Peter N. Ireland, 2004. "Technology Shocks in the New Keynesian Model," NBER Working Papers 10309, National Bureau of Economic Research, Inc.
  6. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  7. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135 Elsevier.
  8. Charles T. Carlstrom & Timothy S. Fuerst & Fabio Ghironi, 2002. "Does it matter (for equilibrium determinacy) what price index the central bank targets?," Working Paper 0202, Federal Reserve Bank of Cleveland.
  9. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  10. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  11. Hasan Bakhshi & Pablo Burriel-Llombart, 2003. "Endogenous Price Stickiness, Trend Inflation, and the New Keynesian Phillips Curve," Computing in Economics and Finance 2003 12, Society for Computational Economics.
  12. Ireland, Peter N., 1997. "A small, structural, quarterly model for monetary policy evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 83-108, December.
  13. David Romer, 1989. "Staggered Price Setting with Endogenous Frequency of Adjustment," NBER Working Papers 3134, National Bureau of Economic Research, Inc.
  14. Caplin, Andrew & Leahy, John, 1991. "State-Dependent Pricing and the Dynamics of Money and Output," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 683-708, August.
  15. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  16. Caplin, A. & Leahy, J., 1992. "Aggregation and Optimization with State-Dependent Pricing," Discussion Papers 1992_15, Columbia University, Department of Economics.
  17. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November.
  18. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1997. "State-dependent pricing and the dynamics of business cycles," Working Paper 97-02, Federal Reserve Bank of Richmond.
  19. 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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  25. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  26. repec:dgr:kubcen:199597 is not listed on IDEAS
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