Asymmetric Price Adjustment: Micro-foundations and Macroeconomic Implications

V Bhaskar

No 547, Economics Discussion Papers from University of Essex, Department of Economics

Abstract: We present a simple menu cost model which explains the finding that firms are more likely to adjust prices upward than downward. Asymmetric adjustment to shocks arises naturally, even without trend inflation, from the desire of firms to keep industry prices as high as is sustainable and the non-convexity due to menu costs. It implies that aggregate demand shocks have asymmetric effects - negative shocks are reduce output, whereas positive shocks are inflationary. We examine the implications of asymmetric adjustment for equilibrium output and the optimal inflation rate.

New Economics Papers: this item is included in nep-fin
Date: 2002-09-27
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