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Inflation Regimes And Price-Setting Interactions

Author

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  • EDOARDO GAFFEO

    (Department of Economics and CEEL, University of Trento, Via Inama 5 I-38100 Trento, Italy)

Abstract

A large body of empirical work is clear-cut in suggesting that the international post-war inflation experience may be described in terms of switches among multiple regimes. A definite explanation of this stylized fact, however, is still under debate. In this paper, we model an economy composed of a large number of interacting price-setting firms which can replicate the evidence at hand. Interactions emerge as a by-product of consumers' uncertainty on the prices charged by different firms. The underlying Markovian structure possesses a stationary distribution with multiple modes, so that its associated dynamics is characterized by multiple regimes and sudden transitions among them. In particular, for any (almost-fully accommodating) monetary policy reaction function, the existence of a multiplicity of inflation regimes is associated to the information acquisition technology consumers have in searching for the lowest price.

Suggested Citation

  • Edoardo Gaffeo, 2005. "Inflation Regimes And Price-Setting Interactions," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 339-355.
    • Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:03:n:s0219024905003001
    DOI: 10.1142/S0219024905003001
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    References listed on IDEAS

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