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An Improvement on Sticky Price Assumptions

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

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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.

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