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Decoupling nominal and real rigidities

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  • König, Philipp J.
  • Meyer-Gohde, Alexander

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.

Suggested Citation

  • König, Philipp J. & Meyer-Gohde, Alexander, 2017. "Decoupling nominal and real rigidities," Economics Letters, Elsevier, vol. 156(C), pages 129-132.
    • Handle: RePEc:eee:ecolet:v:156:y:2017:i:c:p:129-132
    DOI: 10.1016/j.econlet.2017.04.019
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    References listed on IDEAS

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    1. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115(2), pages 171-199.
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    4. König, Philipp & Meyer-Gohde, Alexander, 2014. "Strategic complementarities and nominal rigidities," SFB 649 Discussion Papers 2014-054, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    5. Gita Gopinath & Oleg Itskhoki, 2011. "In Search of Real Rigidities," NBER Chapters, in: NBER Macroeconomics Annual 2010, volume 25, pages 261-309, National Bureau of Economic Research, Inc.
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    8. John, A.Andrew & Wolman, Alexander L., 2008. "Steady-state equilibrium with state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 383-405, March.
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    More about this item

    Keywords

    Global games; Menu costs; Sticky prices;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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