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INFLATION REGIMES AND PRICE-SETTING INTERACTIONS

Edoardo Gaffeo

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 03, 339-355

Abstract: A large body of empirical work is clear-cut in suggesting that the international post-war inflation experience may be described in terms of switches among multiple regimes. A definite explanation of this stylized fact, however, is still under debate. In this paper, we model an economy composed of a large number of interacting price-setting firms which can replicate the evidence at hand. Interactions emerge as a by-product of consumers' uncertainty on the prices charged by different firms. The underlying Markovian structure possesses a stationary distribution with multiple modes, so that its associated dynamics is characterized by multiple regimes and sudden transitions among them. In particular, for any (almost-fully accommodating) monetary policy reaction function, the existence of a multiplicity of inflation regimes is associated to the information acquisition technology consumers have in searching for the lowest price.

Keywords: Inflation; regime switching; interactions (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1142/S0219024905003001

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