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.
Keywords: Nominal price rigidity, indeterminacy
Full paper (93 KB PDF)
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Last update: January 27, 1998
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