Fair prices, sticky information, and the business cycle

Johan Söderberg

No 2015:1, Research Papers in Economics from Stockholm University, Department of Economics

Abstract: A fair price model in which firms are hesitant to raise their prices due to concerns about adverse consumer reactions is developed and integrated into the standard New Keynesian framework. In the model, monetary neutrality arise as a combination of a fairness constraint putting a limit on how high prices can be set over households’ projections of firms’ marginal cost, and households’ limited ability to accurately observe marginal cost. I show analytically that the model is consistent with a plethora of outcomes, ranging from complete monetary neutrality to generating substantial real effects. When plausible values are assigned to parameters and prices are strategic complements, business cycle dynamics closely resembles that in the sticky information model proposed by Mankiw and Reis (2002).

Keywords: Price Setting; Fairness Concerns; Sticky Information; Monetary Non-Neutrality (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2015-01-13
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www2.ne.su.se/paper/wp15_01.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:sunrpe:2015_0001

Access Statistics for this paper

More papers in Research Papers in Economics from Stockholm University, Department of Economics Department of Economics, Stockholm, S-106 91 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Anne Jensen ( this e-mail address is bad, please contact ).