The Impact of Trade Integration and Competition on Real and Nominal Price Rigidities: Insights from a New-Keynesian DSGE Model

Anna Watson

DEGIT Conference Papers from DEGIT, Dynamics, Economic Growth, and International Trade

Abstract: The paper examines the impact of trade integration and product market competition on firms' price setting behaviour and the degree of price stickiness. The analysis is based on a New-Keynesian open-economy DSGE model with variable desired mark-ups and Calvo price setting in which the frequency of price adjustment is endogenised. The study demonstrates that trade integration and the resulting changes in competition affect the degree of strategic complementarity in firms' price setting decisions and the frequency with which firms change their prices, which determine the degree of real and nominal price rigidities respectively. The micro-founded macroeconomic model constructed explains the positive relationship between competition and the frequency of price adjustment evident from empirical studies and surveys of firms' price setting behaviour. By accounting for the impact of competition on firms' pricing policies, the study also provides new insights into the effects of global economic integration on the Phillips Curve and inflation dynamics.

Keywords: Competition; Nominal and Real Price Rigidities; Frequency of Price Adjustment; Globalisation; Phillips Curve (search for similar items in EconPapers)
JEL-codes: E31 E32 F41 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2010-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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