Destabilising Stabilisation Policy in a Dynamic Menu Cost Model

Per Svejstrup Hansen

No 24206, Unit of Economics Working Papers from Royal Veterinary and Agricultural University, Food and Resource Economic Institute

Abstract: This paper analyses how systematic stabilisation policy by monetary authorities may change individual price adjustment decision. The model is a stochastic dynamic menu cost model that results in (S,s)-price rules where the price is fixed inside a band. The resulting price rigidity causes output to fluctuate, and hence there is room for stabilisation policy. This paper shows that such a policy might actually be destabilising in the sense that the zone of fixed prices widens, leading to larger output fluctuations. In fact, output can be completely stabilised by a policy that amplifies shocks.

Keywords: Demand; and; Price; Analysis (search for similar items in EconPapers)
Pages: 18
Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:ags:rvaewp:24206

DOI: 10.22004/ag.econ.24206

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