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American Economic Review: Vol. 89 No. 4 (September 1999)

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A Dynamic Economy with Costly Price Adjustments

Article Citation

Danziger, Leif. 1999. "A Dynamic Economy with Costly Price Adjustments." American Economic Review, 89(4): 878-901.

DOI: 10.1257/aer.89.4.878

Abstract

This paper studies a general-equilibrium model of a dynamic economy with menu costs. Each firm's productivity is exposed to idiosyncratic and aggregate productivity shocks around a trend, and the money supply to monetary shocks around a trend. All consumption, pricing, and production decisions are based on optimizing behavior. There exists a staggered Markov perfect equilibrium with prices determined by a two-sided (s, S) markup strategy. The paper analyzes the optimal markup strategy and investigates the dynamics of the price index and the aggregate output. The welfare consequences of the uncertain aggregate productivity and money supply are also examined.

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Authors

Danziger, Leif (York U)

JEL Classifications

E31: Price Level; Inflation; Deflation
E32: Business Fluctuations; Cycles
C11: Bayesian Analysis


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