Publikationen des DIW Berlin

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Decoupling Nominal and Real Rigidities: A Reexamination of the Canonical Model of Price Setting under Menu Costs Philipp König, Alexander Meyer-Gohde In: Economics Letters 156 (2017), S. 129-132

Abstract:

We revisit Ball and Romer’s (1990) canonical model of price setting with menu costs that exhibits multiple equilibria. We show that changes to firms’ markups move nominal and real rigidities in opposite directions. Using game-theoretic tools to derive a unique equilibrium, we find that accounting for agents’ endogenous adjustment of price expectations further weakens the link between real and nominal rigidities.

JEL-Classification:

E31;C70;D82

Keywords:

Global games, Menu costs, Sticky prices