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Implications of state-dependent pricing for DSGE model-based policy analysis in Indonesia

Denny Lie ()

Economic Analysis and Policy, 2021, vol. 71, issue C, 532-552

Abstract: This paper builds a small open economy dynamic stochastic general equilibrium (DSGE) model for Indonesia with state-dependent pricing (SDP) and studies its implications for policy analysis. Variations in the extensive margin of price adjustment under SDP are shown to non-trivially affect the model-generated variance decompositions and impulse responses to various shocks. DSGE model-based policy analyses conducted without this extensive margin feature might therefore lead to inaccurate policy prescriptions. In particular, the SDP model would call for a greater degree of monetary easing in response to the COVID-19 pandemic, than that prescribed by the standard time-dependent pricing (TDP) model.

Keywords: State-dependent pricing; Monetary policy; DSGE model for Indonesia; COVID-19 pandemic (search for similar items in EconPapers)
JEL-codes: E12 E32 E58 E61 F41 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Implications of state-dependent pricing for DSGE model-based policy analysis in Indonesia (2021) Downloads
Working Paper: Implications of state-dependent pricing for DSGE model-based policy analysis in Indonesia (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:71:y:2021:i:c:p:532-552

DOI: 10.1016/j.eap.2021.06.003

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