Ambiguity and macroeconomics:a rationale for price stickiness

Marcello Basili and Stefano Dalle Mura ()

Department of Economics University of Siena from Department of Economics, University of Siena

Abstract: This paper deals with the emergence of price stickiness, that is nominal price elasticity below one, in the wake of nominal shocks. The setting of analysis is a general equilibrium model with both ambiguity and rational expectations. Ambiguity and macroeconomics are linked exploiting a micro-founded framework. Ambiguity concerns the lack of knowledge of firms about the relationship between changes in the aggregated stock of money and in the money distribution across heterogeneous consumers in the economy. Ambiguity is represented through a multiple priors approach. It is shown that price stickiness can emerge even if a change in the money supply level does not alter the distribution of money across consumers (uniform monetary policy). The key assumption made in the paper is that attitude towards ambiguity of firms is asymmetric: ambiguity aversion towards uncertain positive outcomes (gains) and ambiguity seeking towards negative outcomes (losses). By focusing on the dynamics of beliefs following a change in the stock of money that does not alter the money distribution, it is shown that money neutrality remains true in the long run

Keywords: Ambiguity; multiple priors; incomplete information; price stickiness (search for similar items in EconPapers)
JEL-codes: D81 E52 O42 (search for similar items in EconPapers)
Date: 2004-06
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:usi:wpaper:428

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