An Improvement on Sticky Price Assumptions

Belanger, Gilles (2014): An Improvement on Sticky Price Assumptions.

Abstract

This paper suggests an improvement to the assumptions underlying the New Keynesian Phillips Curve. The Curve rests on the assumption that price constrained producers commit to align their production along the demand curve, bypassing profit maximization. This assumption unnecessarily makes demand-driven supply a postulate instead of a result. This paper shows price constrained producers align their production along the demand curve, without commitment, if faced with constant marginal costs, and that this supposes additional agents, retailers. Furthermore, the paper restates how without this commitment, but with increasing marginal costs, the New Keynesian Phillips Curve is invalid and prices are acyclical, not procyclical.

• Item Type: MPRA Paper
• Language: English
• Keywords: New Keynesian Phillips Curve, micro-foundations, price rigidity, marginal cost, Retailers.
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

References

Backhouse, Roger and Mauro Boianovsky (2005), "Disequilibrium Macroeconomics: An Episode In The Transformation Of Modern Macroeconomics," Working Paper 012, ANPEC.

Backhouse, Roger E. and Mauro Boianovsky (2013), Transforming Modern Macroeconomics, number 9781107023192 in Cambridge Books, Cambridge University Press.

Barsky, Robert B., Mark Bergen, Shantanu Dutta and Daniel Levy (2002), "What Can the Price Gap between Branded and Private-Label Products Tell Us about Markups?" in Scanner Data and Price Indexes, eds. Robert C. Feenstra and Matthew D. Shapiro, NBER Chapters, chapter 7, pp. 165-228, Cambridge: National Bureau of Economic Research, Inc.

Bernanke, Ben S., Mark Gertler and Simon Gilchrist (1999), "The Financial Accelerator in a Quantitative Business Cycle Framework," in Handbook of Macroeconomics, eds. John B. Taylor and Michael Woodford, pp. 1341-1393, Amsterdam: Elsevier.

Botman, Dennis P. J., Philippe D. Karam, Douglas Laxton and David Rose (2007), "DSGE Modeling at the Fund: Applications and Further Developments," IMF working papers, International Monetary Fund.

Calvo, Guillermo A. (1983), "Staggered Prices in a Utility-Maximizing Framework," Journal of Monetary Economics, 12(3), pp. 383-398.

Christiano, Lawrence J., Martin Eichenbaum and Charles L. Evans (2005), "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, 113(1), pp. 1-45.

Christiano, Lawrence J., Mathias Trabandt and Karl Walentin (2010), "DSGE Models for Monetary Policy Analysis," in Handbook of Monetary Economics, eds. Benjamin M. Friedman and Michael Woodford, volume 3, chapter 7, pp. 285-367, Amsterdam: Elsevier.

Dixit, Avinash K. and Joseph E. Stiglitz (1977), "Monopolistic Competition and Optimum Product Diversity," American Economic Review, 67(3), pp. 297-308.

Dotsey, Michael (2013), "DSGE Models and Their Use in Monetary Policy," Business Review, Q2, pp. 10-16.

Mankiw, N. Gregory (2006), "The Macroeconomist as Scientist and Engineer," Journal of Economic Perspectives, 20(4), pp. 29-46.

Roberts, John M. (1995), "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, 27(4), pp. 975-984.

Sims, Christopher A. (2012), "Statistical Modeling of Monetary Policy and Its Effect," American Economic Review, 102(4), pp. 1187-1205.

Smets, Frank, Kai Christoffel, Günter Coenen, Roberto Motto and Massimo Rostagno (2010), "DSGE Models and Their Use at the ECB," SERIEs, 1(1-2), pp. 51-65.

Smets, Frank and Raf Wouters (2003), "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, 1(5), pp. 1123-1175.

Walsh, Carl E. (2005), "Labor Market Search, Sticky Prices, and Interest Rate Policies," Review of Economic Dynamics, 8(4), pp. 829-849.

Woodford, Michael (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton: Princeton University Press.

Yun, Tack (1996), "Nominal Price Rigidity, Money Supply Endogeneity, and Business Cycles," Journal of Monetary Economics, 37(2), pp. 345-370.