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Implications of state-dependent pricing for DSGE model-based policy analysis in Indonesia

Denny Lie ()

No 2020-08, Working Papers from University of Sydney, School of Economics

Abstract: This paper builds a small open economy dynamic stochastic general equilibrium (DSGE) model for Indonesia with state-dependent pricing (SDP) and studies its implications for policy analysis. Variations in the extensive margin of price adjustment under SDP are shown to non-trivially affect the model-generated variance decompositions and impulse responses to various shocks. DSGE model-based policy analyses conducted without this extensive margin feature might therefore lead to inaccurate policy prescriptions. In particular, the SDP model would call for a greater degree of monetary easing in response to the COVID-19 pandemic, than that prescribed by the standard time-dependent pricing (TDP) model.

Keywords: state-dependent pricing; monetary policy; DSGE model for Indonesia; COVID-19 pandemic (search for similar items in EconPapers)
Date: 2020-07, Revised 2021-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-sea
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