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on Dynamic General Equilibrium |
| By: | Ruy Lama (International Monetary Fund); Carlos Urrutia (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)) |
| Abstract: | We build a small open economy, real business cycle model with labor market frictions to evaluate the role of employment protection in shaping business cycles in emerging economies. The model features matching frictions and an endogenous selection effect by which inefficient jobs are destroyed in recessions. In a quantitative version of the model calibrated to the Mexican economy we find that reducing separation costs to a level consistent with developed economies would reduce output volatility by 15 percent. We also use the model to analyze the Mexican crisis episode of 2008 and conclude that an economy with lower separation costs would have experienced a smaller drop in output and in measured total factor productivity with no significant change in aggregate employment. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:1105&r=dge |
| By: | Andreasen, Martin (Bank of England); Ferman, Marcelo (LSE); Zabczyk, Pawel (Bank of England) |
| Abstract: | This paper develops a DSGE model in which banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. We show within a real business cycle framework that maturity transformation in the banking sector in general attenuates the output response to a technological shock. Implications of long-term nominal contracts are also examined in a New Keynesian version of the model, where we find that maturity transformation reduces the real effects of a monetary policy shock. |
| Keywords: | Banks; DSGE model; financial frictions; firm heterogeneity; maturity transformation |
| JEL: | E22 E32 E44 G21 |
| Date: | 2012–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0446&r=dge |
| By: | Rodney Strachan (Australian National University); Herman K. van Dijk (Erasmus University Rotterdam, and VU University Amsterdam.) |
| Abstract: | The empirical support for features of a Dynamic Stochastic General Equilibrium model with two technology shocks is valuated using Bayesian model averaging over vector autoregressions. The model features include equilibria, restrictions on long-run responses, a structural break of unknown date and a range of lags and deterministic processes. We find support for a number of features implied by the economic model and the evidence suggests a break in the entire model structure around 1984 after which technology shocks appear to account for all stochastic trends. Business cycle volatility seems more due to investment specific technology shocks than neutral technology shocks. |
| Keywords: | Posterior probability; Dynamic stochastic general equilibrium model; Cointegration; Model averaging; Stochastic trend; Impulse response; Vector autoregressive model |
| JEL: | C11 C32 C52 |
| Date: | 2012–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120025&r=dge |
| By: | Rüdiger Bachmann; Lin Ma |
| Abstract: | How do microeconomic frictions and microeconomic heterogeneity affect macroeconomic dynamics? We revisit the recent claim in the literature that nonconvex capital adjustment costs do not matter for aggregate dynamics. We argue that the neutrality of fixed adjustment frictions in general equilibrium hinges on the assumption of capital good homogeneity. With only one type of capital good to save and invest in, fixed capital investment dynamics are tightly linked to consumption dynamics, which are similar across lumpy and frictionless investment models. With capital goods heterogeneity, households optimally substitute between different ways of saving, which renders their consumption/saving decisions more sensitive to capital adjustment frictions. We quantify our arguments by introducing inventories into a two-sector lumpy investment model. We find that with inventories, frictionless fixed capital adjustment leads to an initial response of fixed capital investment to productivity shocks that is 50% higher than with capital adjustment frictions, calibrated to the fraction of plants undergoing lumpy investment episodes. We argue more generally that the details of how general equilibrium is introduced into the physical environment of a model matters for the aggregate relevance of microeconomic frictions and microeconomic heterogeneity. |
| JEL: | E20 E22 E3 E32 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17924&r=dge |
| By: | Irina A. Telyukova; Ludo Visschers |
| Abstract: | We investigate quantitative implications of precautionary demand for money for business cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models, the only uncertainty affecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need and find that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables |
| Keywords: | Precautionary demand for money, Business cycle fluctuations, Money velocity fluctuations |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1142&r=dge |
| By: | Villa, Stefania (Birkbeck College, University of London); Yang, Jing (Bank for International Settlements) |
| Abstract: | Gertler and Karadi combined financial intermediation and credit policy in a DSGE framework. We estimate their model with UK data using Bayesian techniques. To validate the fit, we evaluate the model’s empirical properties. Then we analyse the transmission mechanism of the shocks, set to produce a downturn. Finally, we examine the empirical importance of nominal, real and financial frictions and of different shocks. We find that banking friction seems to play an important role in explaining the UK business cycle. Moreover, the banking sector shock seems to explain about half of the fall in real GDP in the recent crisis. A credit supply shock seems to account for most of the weakness in bank lending. |
| Keywords: | Financial friction; DSGE; Bayesian estimation |
| JEL: | C11 E44 |
| Date: | 2011–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0431&r=dge |
| By: | Annamaria Lusardi; Pierre-Carl Michaud; Olivia S. Mitchell |
| Abstract: | Recent studies show that financial literacy is strongly positively related to household wealth, but there is also substantial cross-sectional variation in both financial literacy and wealth levels. To explore these patterns, the authors develop a calibrated stochastic life cycle model which features endogeneous financial literacy accumulation. Their model generates substantial wealth inequality, over and above what standard lifecycle models produce. This is due to the fact that higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with the precautionary saving motive, boosts their need for private wealth accumulation and thus financial literacy. They show that the fraction of the population which is rationally "financially ignorant" depends on the level of labor income uncertainty as well as the generosity of the retirement system. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:ran:wpaper:905&r=dge |
| By: | Konstantinos Angelopoulos (University of Glasgow); James Malley (University of Glasgow); Apostolis Philippopoulos (Athens University of Economics and Business,CESifo) |
| Abstract: | This paper studies the aggregate and distributional implications of Markov-perfect tax-spending policy in a neoclassical growth model with capitalists and workers. Focusing on the long run, our main findings are: (i) it is optimal for a benevolent government, which cares equally about its citizens, to tax capital heavily and to subsidize labour; (ii) a Pareto improving means to reduce inefficiently high capital taxation under discretion is for the government to place greater weight on the welfare of capitalists; (iii) capitalists and workers preferences, regarding the optimal amount of "capitalist bias", are not aligned implying a conflict of interests. |
| Keywords: | Optimal fiscal policy; Markov-perfect equilibrium; heterogeneous agents |
| JEL: | E62 H21 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:142&r=dge |
| By: | Sangeeta Pratap (Hunter College and Graduate Center City University of New York); Carlos Urrutia (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)) |
| Abstract: | Financial crises in emerging economies are accompanied by a large fall in total factor productivity. We explore the role of financial frictions in exacerbating the misallocation of resources and explaining this drop in TFP. We build a two-sector model of a small open economy with a working capital constraint to the purchase of intermediate goods. The model is calibrated to Mexico before the 1995 crisis and subject to an unexpected shock to interest rates. The financial friction generates an endogenous fall in TFP and output and can explain more than half of the fall in TFP and 74 percent of the fall in GDP per worker. |
| Keywords: | Financial crises, total factor productivity, financial frictions |
| JEL: | E32 F41 G01 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:1104&r=dge |
| By: | Carlsson, Mikael (Research Department, Central Bank of Sweden); Westermark, Andreas (Research Department, Central Bank of Sweden) |
| Abstract: | In central theories of monetary non-neutrality the Ramsey optimal inflation rate varies between the negative of the real interest rate and zero. This paper explores how the interaction of nominal wage and search and matching frictions affect the policy prescription. We show that adding the combination of such frictions to the canonical monetary model can generate an optimal inflation rate that is significantly positive. Specifically, for a standard U.S. calibration, we find a Ramsey optimal inflation rate of 1.11 percent per year. |
| Keywords: | Optimal Monetary Policy; Inflation; Labor-market Distortions |
| JEL: | E52 H21 J60 |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0259&r=dge |
| By: | Taskin, Temel |
| Abstract: | In this paper, we study the interaction between self insurance and public insurance. In particular, we provide evidence on the relationship between unemployment insurance benefits and home production using the American Time Use Survey (ATUS) and the state-level unemployment insurance data of the U.S. The empirical results suggest that moving to a two times more generous state would decrease time spent on home production about 20% for unemployed. Then we pursue a quantitative assessment using a dynamic competitive equilibrium model in which households do home production as well as market production. The model is able to generate the empirical facts regarding unemployment benefits and home production. The fact that unemployment insurance benefits crowd out home production is interpreted as a substitution between the two insurance mechanisms against loss of earnings during unemployment spells. |
| Keywords: | Unemployment insurance; home production; public insurance; self insurance; heterogeneous agents models |
| JEL: | D13 J65 D91 E21 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37583&r=dge |
| By: | Coles, Melvyn G.; Mortensen, Dale T. |
| Abstract: | This paper identifies a data-consistent, equilibrium model of unemployment, wage dispersion, quit turnover and firm growth dynamics. In a separating equilibrium, more productive firms signal their type by paying strictly higher wages in every state of the market. Workers optimally quit to firms paying a higher wage and so move effciently from less to more productive firms. Start-up firms are initially small and grow endogenously over time. Consistent with Gibrats law, individual firm growth rates depend on firm productivity but not on firm size. Aggregate unemployment evolves endogenously. Restrictions are identified so that the model is consistent with empirical wage distributions. |
| Date: | 2012–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:ese:iserwp:2012-07&r=dge |
| By: | Andres Fernandez (Universidad de los Andes); Felipe Meza (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)) |
| Abstract: | Motivated by the fact that, over the business cycle, labor dynamics in emerging economies differ in nontrivial ways from those observed in developed economies, we assess the relative importance of trend shocks in emerging economies in the business cycle model of Aguiar and Gopinath (2007) when labor data is explicitly taken into account. We study Mexico and Canada as representatives of emerging and developed economies, respectively. We find for Mexico that, in the benchmark case with Cobb-Douglas preferences, the income effect on consumption of trend shocks is too strong, delivering countercyclical and counterfactual fluctuations in employment. The model faces a trade-off between, on the one hand, having sizeable growth shocks, thereby having a good match in terms of relatively high consumption volatility, and, on the other, having procyclical employment dynamics. This is remedied when both quasilinear preferences are assumed and the identification strategy explicitly takes into consideration labor dynamics. In this case trend shocks continue to be relatively stronger in emerging economies. Additionally, we find that differences in labor dynamics across emerging and developing economies are associated with the relatively large informal labor sector in emerging economies. It is in this dimension, when trying to match the dynamics of formal employment, that we find less evidence supporting an important role of trend shocks as being the main driving force of business cycles in emerging economies. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:1106&r=dge |
| By: | Basu, Sujata; Mehra, Meeta K |
| Abstract: | We examine human capital's contribution to economy-wide technological progress through two channels -- imitation and innovation -- innovation being more skilled-intensive than innovation. We develop a growth model considering an endogenous ability-driven skill acquisition decision of an individual. We show that skilled labor is growth enhancing in the ``imitation-innovation" regime and the ``innovation-only" regime whereas unskilled labor is growth enhancing in the ``imitation-only" regime. Steady state exists and, in the long run, an economy may or may not converge to the world technology frontier, depending on its initial position and the growth rate of the frontier economy. In the diversified regime, technological progress raises the return to ability and generates an increase in wage inequality between and within groups -- consistent with the pattern observed across countries. |
| Keywords: | Economic Growth; Endogenous Labor Composition; Imitation-Innovation; Convergence; Wage Inequality |
| JEL: | O43 I21 O3 |
| Date: | 2011–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37700&r=dge |
| By: | Marco Battaglini; Salvatore Nunnari; Thomas Palfrey |
| Abstract: | We present a dynamic model of free riding in which n infinitely lived agents choose between private consumption and contributions to a durable public good g. We characterize the set of continuous Markov equilibria in economies with reversibility, where investments can be positive or negative; and in economies with irreversibility, where investments are non negative and g can only be reduced by depreciation. With reversibility, there is a continuum of equilibrium steady states: the highest equilibrium steady state of g is increasing in n, and the lowest is decreasing. With irreversibility, the set of equilibrium steady states converges to a unique point as depreciation converges to zero: the highest steady state possible with reversibility. In both cases, the highest steady state converges to the efficient steady state as agents become increasingly patient. In economies with reversibility there are always non-monotonic equilibria in which g converges to the steady state with damped oscillations; and there can be equilibria with no stable steady state, but a unique persistent limit cycle. |
| JEL: | D78 H41 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17926&r=dge |
| By: | Gareis, Johannes; Mayer, Eric |
| Abstract: | In this paper we study the drivers of fluctuations in the Irish housing market by developing a dynamic stochastic general equilibrium (DSGE) model of Ireland as a member of the European Monetary Union (EMU). We estimate the model with Bayesian methods using time series for both Ireland and the rest of the EMU for the period from 1997:Q1 to 2008:Q2. We find that housing preference (demand) and technology shocks are the main drivers of fluctuations in house prices and residential investment. Moreover, we find that adding housing collateral does not improve the fit of our model to the data. A standard regression analysis shows that a good part of the variation of housing preference shocks is explained by unmodeled demand factors that have been considered in the empirical literature as important determinants of Irish house prices. -- |
| Keywords: | housing,monetary policy,Bayesian estimation |
| JEL: | E44 E52 F41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wuewep:88&r=dge |
| By: | Albert de-Paz; Jesus Marin-Solano; Jorge Navas; Oriol Roch (Universitat de Barcelona) |
| Abstract: | In this paper we analyze how the optimal consumption, investment and life insur- ance rules are modified by the introduction of a class of time-inconsistent preferences. In particular, we account for the fact that an agents preferences evolve along the planning horizon according to her increasing concern about the bequest left to her descendants and about her welfare at retirement. To this end, we consider a stochas- tic continuous time model with random terminal time for an agent with a known distribution of lifetime under heterogeneous discounting. In order to obtain the time- consistent solution, we solve a non-standard dynamic programming equation. For the case of CRRA and CARA utility functions we compare the explicit solutions for the time-inconsistent and the time-consistent agent. The results are illustrated numeri- cally. |
| Keywords: | life insurance, time-consistency, consumption and portfolio rules, heterogeneous discounting |
| JEL: | D91 G11 C61 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bar:bedcje:2012277&r=dge |
| By: | Rousakis, Michael (University of Warwick) |
| Abstract: | How does the economy respond to shocks to expectations? This paper addresses this question within a cashless, monetary economy. A competitive economy features producers and consumers/workers with asymmetric information. Only workers observe current productivity and hence they perfectly anticipate prices, whereas all agents observe a noisy signal about long-run productivity. Information asymmetries imply that monetary policy and consumers' expectations have real effects. Non-fundamental, purely expectational shocks are conventionally thought of as demand shocks. While this remains a possibility, expectational shocks can also have the characteristics of supply shocks : if positive, they increase output and employment, and lower inflation. Whether expectational shocks manifest themselves as demand or supply shocks depends on the monetary policy pursued. Forward-looking policies generate multiple equilibria in which the role of consumers' expectations is arbitrary. Optimal policies restore the complete information equilibrium. They do so by manipulating prices so that producers correctly anticipate their revenue despite their uncertainty about current productivity. I design targets for forward-looking interest-rate rules which restore the complete information equilibrium for any policy parameters. In ation stabilization per se is typically suboptimal as it can at best eliminate uncertainty arising through prices. This offers a motivation for the Dual Mandate of central banks. Key words: Asymmetric information ; producer expectations ; consumer expectations ; business cycles ; supply shocks ; demand shocks ; optimal monetary policy JEL Classification: E32 ; E52 ; D82 ; D83 ; D84 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:984&r=dge |
| By: | Gerke, Rafael; Jonsson, Magnus; Kliem, Martin; Kolasa, Marcin; Lafourcade, Pierre; Locarno, Alberto; Makarski, Krzysztof; McAdam, Peter |
| Abstract: | The recent global financial crisis has increased interest in macroeconomic models that incorporate financial linkages. Here, we compare the simulation properties of five mediumsized general equilibrium models used in Eurosystem central banks which incorporate such linkages. The financial frictions typically considered are the financial accelerator mechanism (convex \spread costs related to firms' leverage ratios) and collateral constraints (based on asset values). The harmonized shocks we consider illustrate the workings and mechanisms underlying the financial-macro linkages embodied in the models. We also look at historical shock decompositions of real GDP growth across the models since 2005 in order to shed light on the common driving factors underlying the recent financial crisis. In these exercises, the models share qualitatively similar and interpretable features. This gives us confidence that we have some broad understanding of the mechanisms involved. In addition, we also survey the current and developing trends in the literature on financial frictions. -- |
| Keywords: | Financial Frictions,Credit Constraints,Financial Accelerator,Model Comparison,Eurosystem central bank models |
| JEL: | E32 E44 E47 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:022012&r=dge |
| By: | Roberto Pinheiro; Ludo Visschers |
| Abstract: | Workers in less secure jobs are often paid less than identical-looking workers in more secure jobs. We show that this lack of compensating differentials for unemployment risk can arise in equilibrium when all workers are identical, and firms differ, but do so only in offered job security (the probability that the worker is not sent into unemployment). In a setting where workers search on and off the job, wages paid increase with job security for at least all firms in the risky tail of the distribution of firm-level unemployment risk. As a result, unemployment spells become persistent for low-wage and unemployed workers, a seeming pattern of ‘unemployment scarring’, that is created entirely by firm heterogeneity alone. Higher in the wage distribution, workers can take wage cuts to move to more stable employment |
| Keywords: | Layoff rates, Unemployment risk, Wage differentials, Unemployment scarring |
| JEL: | J31 J63 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1209&r=dge |
| By: | Evans, George W.; Honkapohja, Seppo; Sargent, Thomas J; Williams, Noah |
| Abstract: | Agents have two forecasting models, one consistent with the unique rational expectations equilibrium, another that assumes a time-varying parameter structure. When agents use Bayesian updating to choose between models in a self-referential system, we find that learning dynamics lead to selection of one of the two models. However, there are parameter regions for which the non-rational forecasting model is selected in the long-run. A key structural parameter governing outcomes measures the degree of expectations feedback in Muth's model of price determination. |
| Keywords: | grain of truth; rational expectations equilibrium; Time-varying perceptions |
| JEL: | D83 D84 E37 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8917&r=dge |
| By: | Matteo Cacciatore; Romain Duval; Giuseppe Fiori |
| Abstract: | This paper explores the short-term effects of labour and product market reforms through a dynamic general equilibrium model that features endogenous producer entry, equilibrium unemployment and costly job creation and destruction. Unlike in existing work, the link between labour and product market dynamics and the policy factors driving it are modelled explicitly. The analysis yields three main findings. First, it takes time for reforms to pay off, typically at least a couple of years. This is partly because their benefits materialise through firm entry and increased hiring, both of which are gradual processes, while any reform-driven layoffs are immediate. Second, all reforms appear to stimulate GDP already in the short run, but some of them -- such as job protection reforms -- are found to increase unemployment temporarily. Implementing a broad package of labour and product market reforms enables governments to minimise or even alleviate such transitional costs. Third, reforms are not found to have noticeable deflationary effects, suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath -- either because of the zero bound on policy rates or because the country belongs to a large monetary union -- may not be a relevant obstacle to reform implementation. Alternative simple monetary policy rules have little impact on the transitional costs from reforms.<P>Gain ou perte à court terme ? Une analyse à partir d'un modèle DSGE des effets de court terme des réformes sur les marchés du travail et des produits<BR>Cet article évalue les effets de court terme des réformes des marchés du travail et des produits à l’aide d’un modèle d’équilibre général dynamique incorporant une entrée endogène des firmes, un chômage d’équilibre et des coûts de création et destruction d’emplois. Contrairement aux travaux existants, le lien entre les dynamiques des marchés du travail et des produits et les facteurs politiques qui le gouvernent sont modélisés explicitement. L’analyse fournit trois conclusions principales. Premièrement, il faut du temps pour que les réformes paient, typiquement au moins quelques années. Deuxièmement, il apparaît que toutes les réformes stimulent le PIB dès le court terme, mais que certaines d’entre elles -- telles que les réformes de la protection de l’emploi -- augmentent le chômage temporairement. Mettre en oeuvre simultanément un ensemble de réformes des marchés du travail et des produits permet au gouvernement de minimiser voire d’éviter ces coûts transitoires. Troisièmement, les réformes n’apparaissent pas avoir d’effets déflationnistes majeurs, ce qui suggère que l’incapacité de la politique monétaire à mettre en oeuvre de fortes baisses de taux d’intérêt dans leur foulée -- soit du fait du plancher zéro sur les taux directeurs soit du fait de l’appartenance à une large zone monétaire -- n’est pas un obstacle pertinent à la mise en oeuvre des réformes. Des règles monétaires simples alternatives n’ont qu’un faible impact sur les coûts de transition des réformes. |
| JEL: | E24 E32 J64 |
| Date: | 2012–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:948-en&r=dge |
| By: | Zhang, Hewitt; Hu, Yannan; Hu, Bo |
| Abstract: | The crash of house prices has become an important feature of macroeconomic crisis. We argue that the crash of house prices driven by contractionary monetary policy is not only a reaction, but also accelerates and amplifies the fluctuations of major macroeconomic variables. The impulse response of consumption to the house price shock estimated from Bayesian VAR is of same level as that of investment in Hong Kong, which is distinct from the United States. Therefore, in this paper we conduct a case study of Hong Kong in the 1997-1998 financial crisis and quantitatively analyze the mechanism by developing a general equilibrium model incorporating financial accelerator in both household and entrepreneur sectors. In addition, we introduce real estate producers in order to modify the unrealistic mechanism in existing literature. After estimating the parameters with a combination of calibration and Bayesian method, the simulated impulse responses imply that our model can explain the co-movement of house prices, consumption and investment much better than alternative ones. Moreover, the results of variance decomposition show that interest rate shock can explain most of the house price fluctuations, and a substantial fraction of fluctuations in major macroeconomic variables. |
| Keywords: | house prices; fianncial accelerator; consumption; investment; Hong Kong |
| JEL: | E32 E44 E37 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35534&r=dge |
| By: | Fernando E. Alvarez; Francesco Lippi |
| Abstract: | We model the decisions of a multi-product firm that faces a fixed “menu” cost: once it is paid, the firm can adjust the price of all its products. We characterize analytically the steady state firm’s decisions in terms of the structural parameters: the variability of the flexible prices, the curvature of the profit function, the size of the menu cost, and the number of products sold. We provide expressions for the steady state frequency of adjustment, the hazard rate of price adjustments, and the size distribution of price changes, all in terms of the structural parameters. We study analytically the impulse response of aggregate prices and output to a monetary shock. The size of the output response and its duration increase with the number of products, they more than double as the number of products goes from 1 to ten, quickly converging to the ones of Taylor’s staggered price model. |
| JEL: | E31 E4 E52 E60 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17923&r=dge |