Nominal Adjustment Regimes in an Evolutionary Macrodynamics

Gilberto Lima and Jaylson Silveira ()

Brazilian Review of Econometrics, 2008, vol. 28, issue 1

Abstract: We develop a satisficing evolutionary dynamics to provide microfoundations for (in)complete nominal adjustment. A firm can either pay a cost to update its information set and establish the optimal price (Nash strategy) or make use, without a cost, of past knowledge and try to set a price which is as close as possible to the optimal one (bounded rationality strategy). In a version without mutation, we show that only pure strategy equilibria (survival of only one strategy) emerge, although complete nominal adjustment, and thus money neutrality, is obtained in either case. As for stability, the equilibrium with extinction of Nash (bounded rationality) firms is a local attractor (repulser). In a version with mutation, in turn, while there are only mixed strategy equilibria (survival of both strategies), money is likewise neutral. And in case there is only one equilibrium, it is a local attractor. Besides, the mixed strategy equilibria of the version with mutation become two pure strategy equilibria when the mutation rate tends to zero.

Date: 2008
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