Delivering Endogenous Inertia in Prices and Output

Alok Johri

Review of Economic Dynamics, 2009, vol. 12, issue 4, 736-754

Abstract: This paper presents a DGE model in which aggregate price level inertia is generated endogenously by the optimizing behaviour of price-setting firms. All the usual sources of inertia are absent here ie., all firms are simultaneously free to change their price once every period and face no adjustment costs in doing so. Despite this, the model generates persistent movements in aggregate output and inflation in response to a nominal shock. Two modifications of a standard one-quarter pre-set pricing model deliver these results: learning-by-doing and habit formation in leisure. While the model delivers persistence, simulations based on estimated shocks to tfp and money growth suggest both output and inflation are too volatile relative to the data and fail to closely follow the historical time series. (Copyright: Elsevier)

Keywords: Endogenous price stickiness; Business cycles; Inflation; Nominal rigidities; Learning-by-doing; Habit formation; Propagation mechanisms; Persistence (search for similar items in EconPapers)
JEL-codes: E23 E24 E31 E32 E51 E52 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (14)

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DOI: 10.1016/j.red.2009.03.001

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