Inflation Regimes in a Simple Model with Interacting Price-Setting Firms

Edoardo Gaffeo

No 1B.4, CeNDEF Workshop Papers, January 2001 from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: A huge amount of empirical evidence is clear-cut in suggesting that post-war inflation rates dynamics in several industrialized countries may be modeled as switches among multiple regimes (i.e., time series for inflation rates are typically piecewise stationary around two or more averages). In spite of this, a conclusive explanation for why inflation behaves this way is still missing. Our attempt is that of providing a new piece of analysis which complements existing theories. We model an economy composed of a large number of interacting price-setting firms, where interactions stem from consumers' uncertainty on prices posted by different firms. The underlying Markovian structure possesses a stationary distribution with multiple modes, so that its associated dynamics may be characterized by multiple regimes and sudden transitions among them. In particular, for any (accommodating) policy regime chosen by the monetary authority, the existence of a multiplicity of inflation regimes is related to the information acquisition technology characterizing consumers' searching for the lowest price.

Keywords: Inflation; Regime Switching, Non-Competitive Markets; Interactions. (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2001-01-04
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Persistent link: https://EconPapers.repec.org/RePEc:ams:cdws01:1b.4

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