Sticky Prices and Constraints to Produce

Justinas Markauskas, Morten Ravn and José-Víctor Ríos-Rull
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Justinas Markauskas: University College London

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We study whether firms in medium-scale New Keynesian models would voluntarily satisfy demand at their posted prices, or whether nominal rigidities may push prices below marginal costs. In the Altig et al (2011) framework, which features full indexation of non-adjusting prices and wages to steady-state inflation and near constant returns to scale at the firm level, we find that violations of firms’ willingness-to-supply condition are negligible: fewer than one percent of firms are ever constrained, and the associated output losses are tiny. Two features of the model drive this result: marginal costs that are nearly unresponsive to output, and prices that adjust more frequently than wages. When the short-run marginal-cost schedule is sufficiently steep, willingness-to-supply violations become quantitatively relevant. Our findings thus characterize the conditions under which the standard demand-determination assumption is a reliable approximation and those under which it may not be.

Keywords: Willingness-to-supply; New Keynesian macro. (search for similar items in EconPapers)
JEL-codes: E32 E52 E62 E63 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2026
New Economics Papers: this item is included in nep-bec and nep-dge
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