Finance and Economics Discussion Series (FEDS)
January 1998
Staggered Price Setting and Real Rigidities
Abstract:
This paper emphasizes the notion that model features that contribute to endogenous price rigidity under staggered price setting lower the elasticity of marginal cost with respect to output, and these same model features tend to generate equilibrium indeterminacy, or "sunspot fluctuations", under price flexibility. Using this insight, staggered price setting is shown to imply persistent output responses to monetary shocks for certain parameterizations of one- and two-sector models with small increasing returns or countercyclical markups, and other model features that would contribute to persistence are discussed.
Full paper (270 KB Postscript)Keywords: Nominal price rigidity, indeterminacy
PDF: Full Paper
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