Steady-state equilibrium with state-dependent pricing

Andrew John and Alexander Wolman

Journal of Monetary Economics, 2008, vol. 55, issue 2, 383-405

Abstract: State-dependent pricing models are now an operational framework for quantitative business cycle analysis. The analysis in Ball and Romer [1991. Sticky prices as coordination failure. American Economic Review 81 (3), 539-552], however, suggests that such models may be rife with multiple equilibria, for in their static model, price adjustment is always characterized by complementarity, a necessary condition for multiplicity. We study existence and uniqueness of steady-state equilibrium in a discrete-time state-dependent pricing model. We find only weak complementarity and no evidence of multiplicity. However, nonexistence of symmetric steady-state equilibrium with pure strategies arises in the region of the parameter space between flexible and sticky prices.

Date: 2008
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