Price Setting with Strategic Complementarities as a Mean Field Game

Fernando E. Alvarez, Francesco Lippi and Takis Souganidis

No 30193, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the propagation of monetary shocks in a sticky-price general-equilibrium economy where the firms’ pricing strategy feature a complementarity with the decisions of other firms. In a dynamic equilibrium the firm’s price-setting decisions depend on aggregates, which in turn depend on firms’ decisions. We cast this fixed-point problem as a Mean Field Game and establish several analytic results. We study existence and uniqueness of the equilibrium and characterize the impulse response function (IRF) of output following an aggregate “MIT” shock. We prove that strategic complementarities make the IRF larger at each horizon, in a convex fashion. We establish that complementarities may give rise to an IRF with a hump-shaped profile. As the complementarity becomes large enough the IRF diverges and at a critical point there is no equilibrium. Finally, we show that the amplification effect of the strategic interactions is similar across models. For instance, the Calvo model and the Golosov-Lucas model display a comparable amplification, in spite of the fact that the non-neutrality in Calvo is much larger.

JEL-codes: E3 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-dge and nep-gth
Note: EFG ME
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Citations: View citations in EconPapers (6)

Published as Fernando Alvarez & Francesco Lippi & Panagiotis Souganidis, 2023. "Price Setting With Strategic Complementarities as a Mean Field Game," Econometrica, Econometric Society, vol. 91(6), pages 2005-2039, November.

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