restaurant prices and the minimum wage in this paper we examine the effect of the minimum wage on restaurant prices we contribute both to the study of economic impact of the minimum wage and to the study of microeconomic patterns of price stickiness for this purpose we use a unique data set of individual price quotes collected to calculate the consumer price index in france and we estimate a price rigidity model based on a flexible s s rule we find a positive and significant impact of the minimum wage on prices the effect of the minimum wage on prices is however very protracted a change in the minimum wage takes more than a year to fully pass through to retail prices

optimal state dependent rules credibility and inflation inertia abstract we use a state dependent model where pricing rules are optimal to examine the costs of a money based disinflation under various assumptions about the credibility of the policy change our analysis allows us to relate actual credibility and future inflation inertia to the asymmetry of the price deviation distribution an important implication of our state dependent setting is that disinflation can be attained without substantial cost even in a situation of low credibility provided that a mechanism of price alignment eliminates the asymmetry of the price deviation distribution we also develop an analytical framework for analyzing intermediate imperfect credibility cases

the inexorable and mysterious tradeoff between inflation and unemployment this paper discusses the short run tradeoff between inflation and unemployment although this tradeoff remains a necessary building block of business cycle theory economists have yet to provide a completely satisfactory explanation for it according to the consensus view among central bankers and monetary economists a contractionary monetary shock raises unemployment at least temporarily and leads to a delayed and gradual fall in inflation standard dynamic models of price adjustment however cannot explain this pattern of responses reconciling the consensus view about the effects of monetary policy with models of price adjustment remains an outstanding puzzle for business cycle theorists several years ago i gave myself a peculiar assignment i decided to try to summarise all of economics in ten simply stated principles the purpose of this task was to introduce students to the economic way of thinking in the first chapter of my textbook principles of economics i figured if god could boil all of moral philosophy down to ten commandments i should be able to do much the same with economic science most of the ten principles i chose were microeconomic and hard to argue with they involved the importance of tradeoffs marginal analysis the benefits of trade market efficiency market failure and so on i allocated the last three principles to macroeconomics the first of these was a country s standard of living depends on its ability to produce goods and services which i viewed as the foundation of all growth theory the second was prices rise when the government prints too much money which i took to be the essence of classical monetary theory the last of my ten principles is the subject of today s lecture society faces a short run tradeoff between inflation and unemployment perhaps not surprisingly this statement turned out to be controversial when my publisher sent out the manuscript for review a few readers objected

the inflation output trade off with downward wage rigidities the macroeconomic implications of downward nominal wage rigidi ties are analyzed via a dynamic stochastic general equilibrium model featuring aggregate and idiosyncratic shocks a closed form solution for a long run phillips curve relates average output gap to average wage inflation it is virtually vertical at high inflation and flattens at low inflation macroeconomic volatility shifts the curve outwards and reduces output the results imply that stabilization policies play an important role and that optimal inflation may be positive and dif fer across countries with different macroeconomic volatility results are robust to relaxing the wage constraint for example when large idiosyncratic shocks arise jel e23 e24 e31 e63

contract renewal under uncertainty abstract the incentive to adjust prices is considered from a bilateral perspective in a setting where changes in outside opportunities drive the incentive to renew contracts and costs preclude continuous renewal a model encompassing several contract forms is formulated and the existence of an equilibrium to the bilateral renewal game is established prices display inertia and the incumbent contract is found to be more resistant to changes in outside opportunities the larger the costs of contract renewal the variability of outside opportunities and the lower the discount rate the model is shown to match a number of empirical observations on contracts

state dependent pricing and the dynamics of money and output standard macroeconomic models of price stickiness assume that each firm leaves its price unchanged for a fixed amount of time we present an alternative model in which the pricing decision depends on the state of the economy we find a method of aggregating individual price changes that allows a simple characterization of macroeconomic variables the model produces a positive money output correlation and an empirical phillips curve in addition the impact of monetary shocks depends crucially on the current level of output which points to a natural connection between state dependent microeconomics and state dependent macroeconomics i introduction there is a long tradition in macroeconomics of attributing the real effects of nominal demand shocks to nominal price stickiness in this view if there is no change in prices when nominal demand rises then quantities must bear the burden of adjustment hence nominal price rigidity provides the friction needed for nominal demand shocks to be transmitted to the real economy standard models of this transmission mechanism such as fischer 1977 and taylor 1980 are based on the assumption that each firm leaves its price unchanged for a fixed amount of time the main reason for considering such time dependent pricing rules is their analytic tractability constraining firms to adjust their prices at prespecified times both simplifies the derivation of equilibrium strategies and allows the use of powerful time series techniques to analyze aggregate dynamics the main disadvantage of the timedependent approach is that between price adjustments firms are not allowed to respond even to extreme changes of circumstance this makes it difficult to know whether the qualitative effects of money in these models are the result of nominal rigidities per se or of the exogenously imposed pattern of price changes an alternative approach to modeling price stickiness is to allow the price setting decision to depend on the actual state of the

securitization of residential solar photovoltaic assets costs risks and uncertainty abstract limited access to low cost financing is an impediment to high velocity technological diffusion and high grid penetration of solar photovoltaic pv technology securitization of solar assets provides a potential solution to this problem this paper assesses the viability of solar asset backed securities abs as a lower cost financing mechanism and identifies policies that could facilitate implementation of securitization first traditional solar financing is examined to provide a baseline for cost comparisons next the securitization process is modeled the model enables identification of several junctures at which risk and uncertainty influence costs next parameter values are assigned and used to generate cost estimates results show that under reasonable assumptions securitization of solar power purchase agreements ppa can significantly reduce project financing costs suggesting that securitization is a viable mechanism for improving the financing of pv projects the clear impediment to the successful launch of a solar abs is measuring and understanding the riskiness of underlying assets this study identifies three classes of policy intervention that lower the cost of abs by reducing risk or by improving the measurement of risk i standardization of contracts and the contracting process ii improved access to contract and equipment performance data and iii geographic diversification

inflation and costly price adjustment a study of canadian newspaper prices the paper studies the effect of inflation on price behaviour using price data from canadian daily newspapers we test the sheshinski and weiss 1977 monopoly price adjustment model on a sample of monopolistic as well as oligopolistic newspapers in contrast to earlier studies that used data from oligopolistic or monopolistically competitive markets the results depend crucially on the assumptions about how often the firm collects information and revises its optimal pricing policy with infrequent policy revisions the results for monopoly newspapers support the model the results for oligopoly newspapers are similar

some evidence on lump sum versus convex costs of changing prices 2 two models in which price stickiness results from price adjustment costs are tested one an s s pricing model assumes lump sum adjustment costs and predicts firms will make relatively large infrequent price changes the other assumes convex adjustment costs and predicts frequent partial price adjustments survey data of firms price behavior reveal patterns consistent with the s s model however many of the patterns are also consistent with partial adjustment rules although the high percentage of firms which fix prices for a quarter or more casts doubt on the plausibility of the partialadjustment hypothesis i introduction in new keynesian economics price stickiness arises not because of wage rigidity so much as because either the gains to individual firms from changing prices are negligible or the costs of doing so deter full and immediate price changes as a result nominal shocks which affect demand for the firm s product as well as real shocks give rise to changes in output the nature and the timing of the effects of demand changes such as those initiated by monetary policy thus depend on how individual firms respond to the signals they receive sticky price models based on costs of price adjustment take at least two different forms one assumes a lump sum cost to changing prices which leads to predictions that firms generally keep prices fixed and make infrequent relatively large price changes the other assumes convex adjustment costs and leads to the prediction that firms make relatively small and frequent partial adjustments toward a target level evidence drawn from a series of surveys conducted by the national federation of independent business will be used to test the predictions from these two types of models while the data do not allow a definitive test between the two models the available evidence supports the model with lump sum costs of changing prices with the important proviso that there be substantial heterogeneity in the relative costs to firms of making price changes so that the frequency and size of changes vary considerably across firms ii s s rules with lump sum costs of price changes how frequently should a firm change its price when a change takes place how large should it be sheshinski and weiss 1977 and barro 1972 provided the first answers to these questions in their models an individual firm incurs a lump sum cost when changing its nominal price and the firm s profits depend on its real price where real price is defined as the firm s nominal price divided by an index of the prices of all other firms in the economy sheshinski and weiss assume that the firm tries to maximize the present value of its real profits their solution amounts to what is known in the optimal inventory literature as an s s rule in which s s units are ordered when stocks run down to s as applied to a pricing rule when prices rise elsewhere in the economy the firm s real price falls to a lower bound s at which point the firm raises its nominal price so that its real price jumps to s they prove that a more rapid general inflation rate calls for a lower s and higher s furthermore subject to a monotonicity condition a higher general inflation rate calls for a shorter time between price changes after showing a number of numerical examples sheshinski and weiss report that numerical experiments with a quadratic profit function give high intervals between price changes 1 2 years even with very low adjustment costs 1977 300 when the profit function is flat in the neighborhood of the profit maximizing real price there is little benefit from changing price a similar argument appears in the menu cost explanation for real effects of nominal disturbances in the absence of private incentives for individual price changes there may be real aggregate effects of nominal disturbances for example see mankiw 1985 akerlof and yellen 1985 kuran 1986 blanchard and kiyotaki 1987

menu costs and markov inflation a theoretical revision with new evidence abstract we revisit a foundational theoretical paper in the menu cost literature sheshinski and weiss 1983 optimum pricing policy under stochastic inflation review of economic studies 50 3 513 529 one of the few to treat stochastic inflation with persistent deviations from trend in contrast to the original finding we show that optimal pricing in this environment entails using different s s bands in high inflation and low inflation states of the world the low inflation band is strictly contained within the high inflation band this revised solution has very different implications from the original one firms are generally risk loving not risk averse with respect to inflation an increase in the variance of inflation increases price dispersion when inflation is high and decreases price dispersion when inflation is low on an aggregate level this optimal pricing would lead to bunching of prices and non neutrality of money in the setting of caplin and spulber 1987 menu costs and the neutrality of money quarterly journal of economics 102 4 703 725 to test the main finding we construct an establishment level dataset from the months surrounding mexico s tequila crisis in 1995 in the high inflation state price increases are larger and establishments allow their prices to vary more widely around their respective long run mean relative prices cross establishment price dispersion is lower but this result seems due to decreased establishment heterogeneity rather than narrower s s bands overall the evidence suggests that establishments employ wider s s bands in the high inflation state

analytical approximations in models of hysteresis decisions made under ongoing uncertainty and costly reversibility entail a range of the state variable where inaction is optimal which in turn produces hysteresis permanent effects of temporary shifts the range is usually defined by non linear equations that need numerical solutions in this paper a technique of analytical approximations is developed and applied to two models menu costs and investment the resulting explicit solutions help clarify why hysteresis is important even for small irreversibility in the menu cost model hysteresis is two orders of magnitude larger than under the akerlof yellen or mankiw assumptions when decisions that are costly to reverse are made under conditions of ongoing uncertainty the optimum policy usually entails a range of inertia the action should be taken only when the value of the underlying state variable becomes especially favourable and reversed only when it becomes especially unfavourable there is an intermediate range over which inaction is optimal this in turn gives rise to hysteresis starting from a value in the range of inertia if the state variable crosses the action trigger point and then returns to its original level the action will be taken but not reversed thus a temporary change will leave a permanent effect numerical solutions for models of irreversible investment show that the range of inaction is remarkably large even when the cost of reversal is small see brennan and schwartz 1985 constantinides 1986 and dixit 1989a b for examples of this unfortunately the equations tlhat determine the optimum policy are highly non linear they do not have analytical solutions therefore we lack a clearer and more general understanding of why hysteresis is numerically so important in this paper i derive analytical approximations for the solutions of more general problems of this kind when the costs of change are small the idea that small costs of change induce large amounts of inertia has been popularized in the model of akerlof and yellen 1985 mankiw 1985 and others in these models second order small costs of making price changes yield price stickiness in response to first order changes in the money supply this is a simple application of the envelope theorem but these models are static and their application to a dynamic reality must assume either permanent shocks or static expectations when there is ongoing uncertainty which is rationally expected by the decision maker the option value of the status quo enlarges the zone where inaction is optimal adding these features to the mankiw akerlof yellen may model i show that fourth order small costs of change generate first order inertia

bond financing for renewable energy in asia abstract addressing the financing gap for renewable energy re projects in asia is critical to ensure that the rapidly increasing energy needs could be met sustainably this paper explores the cause of the financing gap in asia and proposes the use of bond financing to address the financing gap specifically three fixed income instruments namely local currency denominated lcy corporate bonds asset backed project bonds and financial green bonds will be assessed whilst the potential for these three instruments to mobilize large flows of private sector financing is great key supportive policies aimed at reducing the capital market bias for conventional power generation technologies and supportive re policies are required another key aspect would be the necessary deepening of local and regional fixed income markets before such capital market instruments are able to play a big role

inflation inflation uncertainty and relative price dispersion evidence from bivariate garch m models abstract one potential real effect of inflation is its influence on the dispersion of relative prices in the economy menu cost models generally imply that higher trend inflation will increase price dispersion in contrast signal extraction models predict that increased inflation uncertainty will raise relative price dispersion existing empirical studies do not distinguish between these separate hypotheses we constuct a bivariate garch m model of inflation and relative price dispersion to test these differing explanations in a single model and find that inflation uncertainty dominates trend inflation as a predictor of relative price dispersion

parametric efficiency tests economies of scale and input demand in u s electric power generation duality theory has been applied increasingly in recent years to study the structure of production a major advantage of using duality theory is that systems of input demand equations can be derived by simple differentiation facilitating the use of flexible functional forms also use of duality theory makes it possible to choose a representation of the technology which has desirable properties for estimation such as exogeneity of the regressors however the use of a dual representation of production structure is appropriate only if the corresponding maintained hypothesis concerning economic behavior e g cost minimization or profit maximization is valid the perceived advantages of the dual approach to studying production structure have led to some applications in which the maintained hypothesis concerning economic behavior is unlikely to be appropriate for example neoclassical cost functions have been used to study the characteristics of production in regulated industries despite an extensive theoretical literature indicating that a profit maximizing regulated firm would not minimize costs subject to market prices 2 in this paper we propose a generalized cost function that retains the principal advantages of the neoclassical cost function but does not require that cost minimization subject to market prices be imposed as a maintained hypothesis in our model firms are assumed to base their production decisions on unobservable shadow prices which reflect the effects of regulation on the effective prices of inputs parametric tests for cost minimization are obtained by expressing shadow prices as functions of market prices the generalized cost function is estimated with data for regulated electric utilities the parametric restrictions corresponding to cost minimizing behavior subject to market prices are rejected implying that the use of a neoclassical cost function is not appropriate in this application 3

the phillips curve under state dependent pricing abstract we derive a phillips curve equation from the dynamic stochastic general equilibrium dsge model with state dependent pricing developed by dotsey et al 1999 state dependent pricing and the general equilibrium dynamics of money and output quarterly journal of economics 114 655 690 this state dependent phillips curve encompasses the new keynesian phillips curve nkpc based on calvo type price setting as a special case we analyze the effect of the state dependent terms that is the variations in the distributions of price vintages on inflation persistence and we examine whether the hybrid nkpc that is the nkpc extended by a lagged inflation term can adequately describe inflation dynamics generated in a calibrated state dependent pricing economy

rejecting renewables the socio technical impediments to renewable electricity in the united states if renewable power systems deliver such impressive benefits why do they still provide only 3 percent of national electricity generation in the united states as an answer this article demonstrates that the impediments to renewable power are socio technical a term that encompasses the technological social political regulatory and cultural aspects of electricity supply and use extensive interviews of public utility commissioners utility managers system operators manufacturers researchers business owners and ordinary consumers reveal that it is these socio technical barriers that often explain why wind solar biomass geothermal and hydroelectric power sources are not embraced utility operators reject renewable resources because they are trained to think only in terms of big conventional power plants consumers practically ignore renewable power systems because they are not given accurate price signals about electricity consumption intentional market distortions such as subsidies and unintentional market distortions such as split incentives prevent consumers from becoming fully invested in their electricity choices as a result newer and cleaner technologies that may offer social and environmental benefits but are not consistent with the dominant paradigm of the electricity industry continue to face comparative rejection

permanent effects of monetary policy in a dynamic menu cost model abstract this paper investigates whether a systematic monetary policy can affect output in a dynamic menu cost model that results in s s price rules it will be shown that monetary policy potentially can affect output not only in the short run but also with regard to long run average output even though the policy rule is fully known by the rational firm perfectly anticipated monetary policy intervention may have a permanent real effect in the long run

lumpy price adjustments a microeconometric analysis based on a reduced form state dependent pricing model with random thresholds we specify and estimate a nonlinear panel data model with an unobserved factor representing the common cost or demand components of the unobserved optimal price using this model we are able to assess the relative importance of common and idiosyncratic shocks in explaining the frequency and magnitude of price changes in the case of a wide variety of consumer products in belgium and france we find that the mean level and variability of the random thresholds are key for explaining differences across products in the frequency of price changes we also find that the idiosyncratic shocks represent the most important driver of the magnitude of price changes supplementary materials for this article are available online

the near optimality of mark up pricing mark up pricing policies result in a loss of profits compared to marginal pricing behavior these losses however are often very small even for large changes in the money supply but by adopting a simple pricing rule the firm does not have to forecast the future and avoids the informational and computational costs required to determine the profit maximizing price each period thus even if these costs are small mark up pricing policies may be optimal or approximately so at least for some firms in a macro model this is likely to imply large monetary non neutralities

menu costs and phillips curves this paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation sellers can change price only by incurring a real menu cost we calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new u s data set of individual prices due to klenow and kryvtsov the prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies the model is also used to conduct numerical experiments on the economy s response to various shocks in none of the simulations we conducted did monetary shocks induce large or persistent real responses

one for some or one for all taylor rules and interregional heterogeneity we document a novel empirical phenomenon the u s federal reserve appears to set interest rates partly in response to regional economic disparities this result is robust even after controlling for factors such as the central bank s forecasts and a battery of explanatory variables we argue that this likely does not reflect an explicit concern about regional differences by policymakers but instead can be explained by a model with nonlinear regional phillips curves consistent with the predictions of this model we find that the federal reserve responds disproportionately to fluctuations in low unemployment states alternative explanations cannot account for this finding

economies of scale and utilization in the swiss electric power distribution industry economies of scale and utilization in the swiss electricity distribution industry are analysed a translog variable cost function was estimated using panel data for a sample of 39 municipal utilities over the period 1988 1991 economies of both scale and utilization appear to exist in the distribution of electricity both for small medium and large sized utilities thus the empirical evidence suggests sub additivity of the cost function over the relevant range of output for the swiss electricity distribution utilities a necessary condition for a natural monopoly to exist

stochastic inflation and the optimal policy of price adjustment this paper analyzes the optimal policy of price adjustment for a monopolistic firm in the presence of stochastic inflation it shows that an increase in the expected rate of inflation or in the cost of price adjustment leads to an increase in the initial real price and a decrease in the terminal real price in each period with a fixed nominal price it also shows that the effects of increased riskiness of inflation are ambiguous

on the periodicity of solutions to dynamic problems of costly price adjustment under inflation abstract a monopolistic firm choosing its price path in an inflationary environment with transaction costs associated with changes in nominal prices is often assumed to follow a periodic s s path in real prices it is thus of interest to obtain the periodicity endogenously the note presents a discussion of assumptions ensuring periodicity of solutions

unemployment benefits contract length and nominal wage flexibility we show in a union bargaining model that a decrease in the unemployment benefit level increases not only equilibrium employment but also nominal wage flexibility and thus reduces employment varia

costs of price adjustment and the welfare economics of inflation and disinflation this paper studies the welfare consequences of inflation and disinflation in a model in which monopol istic firms incur a fixed cost of price adjustment it is shown that a moderately increasing price level is associated with higher social welfare than a perfectly stable price level and the model therefore provides theoretical support for the widespread belief that a little bit of inflation is good for the economy nevertheless it is also tr ue that the eradication of a moderate inflation leads to an increase in social welfare copyright 1988 by american economic association

factor substitution and economies of scale and utilisation in kuwait s crude oil industry abstract the cost structure of the crude oil industry in kuwait has been examined with specific focus on factor substitution and economies of scale and utilisation this has been done by estimating translog cost functions both long run and short run using time series data covering the period from 1976 to 1996 the results indicate that the implied production structure is non homothetic and the pattern of scale effect is labour saving but capital and material using the evidence also supports the presence of an induced exogenous technical change which is non neutral labour and capital using and material saving the elasticity of substitution between capital and labour is positive implying that the two inputs are substitute the results also indicate the existence of diseconomies of scale in the production of crude oil but no economies or diseconomies of utilisation

financing investments in renewable energy the impacts of policy design abstract the costs of electric power projects utilizing renewable energy technologies rets are highly sensitive to financing terms consequently as the electricity industry is restructured and new renewables policies are created it is important for policymakers to consider the impacts of renewables policy design on ret financing this paper reviews the power plant financing process for renewable energy projects estimates the impact of financing terms on levelized energy costs and provides insights to policymakers on the important nexus between renewables policy design and financing we review five case studies of renewable energy policies and find that one of the key reasons that ret policies are not more effective is that project development and financing processes are frequently ignored or misunderstood when designing and implementing renewable energy policies the case studies specifically show that policies that do not provide long term stability or that have negative secondary impacts on investment decisions will increase financing costs sometimes dramatically reducing the effectiveness of the program within u s electricity restructuring proceedings new renewable energy policies are being created and restructuring itself is changing the way rets are financed as these new policies are created and implemented it is essential that policymakers acknowledge the financing difficulties faced by renewables developers and pay special attention to the impacts of renewables policy design on financing as shown in this paper a renewables policy that is carefully designed can reduce renewable energy costs dramatically by providing revenue certainty that will in turn reduce financing risk premiums

financing low carbon energy access in africa modern energy access in africa is critical to meeting a wide range of developmental challenges including poverty reduction and the millennium development goals mdgs despite having a huge amount and variety of energy resources modern energy access in the continent is abysmal especially sub saharan africa only about 31 of the sub saharan african population have access to electricity while traditional biomass energy accounts for over 80 of energy consumption in many sub saharan african countries with energy use per capita among the lowest in the world there is no doubt that africa will need to increase its energy consumption to drive economic growth and human development africa also faces a severe threat from global climate change with vulnerabilities in several key areas or sectors in the continent including agriculture water supply energy etc low carbon development provides opportunities for african countries to improve and expand access to modern energy services while also building low emission and climate resilient economies however access to finance from different sources will be critical in achieving these objectives this paper sets out to explore the financial instruments available for low carbon energy access in africa including the opportunities markets and risks in low carbon energy investments in the continent

business cycles in international historical perspective business cycle models seek to answer the question of why economies go through cycles of recession and recovery or boom and bust any theory of the business cycle makes two sorts of claims what shocks are most important in disturbing the economy and what economic structure is necessary for propagating these shocks for example one common explanation of business cycles begins with monetary shocks and then seeks to explain why monetary shocks are not purely neutral as neoclassical theory would have it and instead have real effects at least in the short term early models in this vein were often implicitly or explicitly based on the proposition that markets do not clear continuously early equilibrium real business cycle theories instead emphasized the importance of real shocks especially to technology which may cause socially efficient fluctuations even when markets are always in equilibrium more recent models have attempted to marry the equilibrium approach to macroeconomics with the substantive keynesian ideas that money is not neutral and that economic fluctuations are costly new keynesian theories of the business cycle admit the possibility of a number of economic shocks including monetary and technology shocks but then focus on explaining how nominal price rigidities within the economy can turn these shocks into recessions or booms other models show that business cycles driven by keynesian animal spirits are consistent with rigorous microfoundations and rational expectations seeking empirical evidence for and against these various approaches we turn business cycle theories loose on perhaps the greatest macroeconomic laboratory

the new keynesian economics preface 1 from keynesian to new keynesian economics 2 keynesian microfoundations in historical perspectives part i real rigidities 3 the labour market and real wage rigiditry 4 credit rationing and imperfect capital markets 5 real rigidities in the goods market part ii nominal rigidities introduction 6 rational models of irrational behaviour 7 price setting with adjustment cost 8 real and nominal price rigidity further issues part iii coordination failures and hysteresis 9 coordination failures 10 hysteresis conclusions

s s pricing policy when adjustment costs affect demand abstract adjustment costs in a typical s s pricing policy model are respecified so that price stability affects revenues rather than costs the s s pricing result holds even when menu costs are removed

investment confidence corporate debt and income fluctuations in this paper we present a macroeconomic model with new keynesian features which endogenously generates dynamic paths of income and the stock of corporate debt of a cyclic and chaotic nature from the market clearing condition on goods and money markets we derive the dynamic paths of income and corporate debt whose stability properties depend upon the propensity to invest out of the flow of internally generated funds which in turn is a positive function of income if it is relatively low the dynamic paths on income and corporate debt converge to their steady state long run values when the propensity to invest is neither too low nor too high the system can exhibit either bounded cycles or chaotic dynamics finally if it exceeds a critical upper value an explosive growth of debt occurs and a financial crisis is likely to ensue

the optimality of partial price adjustment policies this paper studies the optimal price adjustment policies of a monopolistically competitive firm whose profit maximizing price is subject to a serially correlated random disturbance the firm chooses its price by comparing the expected cost of present and future price changes with the expected losses occurring when price deviates from its instantaneous profit maximizing value partial price adjustment often is the best way to minimize the sum of these losses prices tend to be more flexible both in response to large shocks to the firm s profit maximizing price and when much uncertainty exists about the future

menu costs firm size and price rigidity abstract if menu costs have a non negligible lump sum component and with larger firms having greater benefits from price adjustments then larger firms will change price more frequently than smaller firms data from new zealand firms support this hypothesis price duration decreases as firm size increases ordered probit analysis indicates the effect comes primarily from larger firms being more likely than smaller firms to raise price in response to a demand or cost increases

a theory of yardstick competition in the typical regulatory scheme a franchised monopoly has little incentive to reduce costs this article proposes a mechanism in which the price the regulatedfirm receives depends on the costs of identical firms in equilibrium each firm chooses a socially efficient level of cost reduction the mechanism generalizes to cover heterogeneous firms with observable differences medicare s prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here

economic theory and the world of practice a celebration of the s s model it was the question of how best to balance the costs of ordering and of running out of stock against the costs of holding excess inventory that inspired kenneth arrow theodore harris and jacob marschak to introduce the s s model in 1951 in this celebratory article we show how this model not only answered important practical questions but also opened the door to a quite startling range of important and challenging follow up questions many of great practical importance and analytic depth the s s model has become one of the touchstone models of economics opening new vistas of applied economic theory to all who internalize its structure today it is universally applied to solve questions faced in inventory control the core model elements uncertainty and fixed costs of adjustment are ubiquitous which has resulted in its becoming the general purpose economic model of discrete adjustment the s s model has also become a profound source of inspiration for macroeconomists seeking to understand the role that discrete microeconomic adjustments play in macroeconomic fluctuations looking forward we foresee rapid growth in the use of s s modeling to aid households making complex and costly financial decisions such as when and how to terminate a mortgage in the projected era of household operations research new modeling challenges will arise due to enriched feedback from the world of practice

on inflation and real price variability this paper studies the consequences of costly price adjustments for the variability of real prices accompanying inflation for constant elasticity demand and cost of production it is shown that a higher demand a lower cost of production or a lower cost of price adjustment leads to less intertemporal variability of real prices if the marginal cost of production does not increase too fast then the average real price is less than the real price that would prevail in the absence of inflation additionally a higher demand a lower cost of production or a lower cost of price adjustment leads to a higher level of real prices

price dynamics under imperfect information abstract the paper considers the pricing decision of a monopolist firm having demand and costs exposed to nominal and real shocks which include both permanent and transitory changes the firm obtains information through both price and quantity signals and the price equation is found by use of a filtering technique it is shown that imperfect information implies nominal price smoothing where the price adjusts only partially relative to the past price by incorporating new information observed through price and quantity signals

contract adjustment under uncertainty abstract consider trade in continuous time between two players the gains from trade are divided according to a contract and at each point in time either player may unilaterally induce a costly adjustment of the contract players payoffs from trade under the contract as well as from trade under an adjusted contract are exogenous and stochastic we consider players choice of whether and when to adjust the contract payment we show that there exists a nash equilibrium in thresholds where each player adjusts the contract whenever the contract payment relative to the outcome of an adjustment passes the threshold there is strategic substitutability in the choice of thresholds so that if one player becomes more active by choosing a threshold closer to unity the other player becomes more passive

the magnitude of menu costs direct evidence from large u s supermarket chains we use store level data to document the exact process of changing prices and to directly measure menu costs at five multistore supermarket chains we show that changing prices in these establishments is a complex process requiring dozens of steps and a nontrivial amount of resources the menu costs average 105 887 year per store comprising 0 70 percent of revenues 35 2 percent of net margins and 0 52 price change these menu costs may be forming a barrier to price changes specifically 1 a supermarket chain facing higher menu costs due to item pricing laws that require a separate price tag on each item changes prices two and one half times less frequently than the other four chains 2 within this chain the prices of products exempt from the law are changed over three times more frequently than the products subject to the law in principle fixed costs of changing prices can be observed and measured in practice such costs take disparate forms in different firms and we have no data on their magnitude so the theory can be tested at best indirectly at worst not at all alan blinder 1991 p 90

price adjustment costs and the output inflation trade off when prices are costly to adjust there is a trade off between the rate of inflation and the firm s average level of output this trade off is the result of fully optimizing behaviour by the firm sufficient conditions are developed for inflation to have no effect on output however these conditions are unlikely to be met in practice this suggests that the superneutrality of money hypothesis is incompatible with the type of demand and cost curves normally encountered in economic theory if the discount rate is positive moderate rates of inflation will always lead to higher levels of output

a dynamic economy with costly price adjustments this paper studies a general equilibrium model of a dynamic economy with menu costs each firm s productivity is exposed to idiosyncratic and aggregate productivity shocks around a trend and the money supply to monetary shocks around a trend all consumption pricing and production decisions are based on optimizing behavior there exists a staggered markov perfect equilibrium with prices determined by a two sided s s markup strategy the paper analyzes the optimal markup strategy and investigates the dynamics of the price index and the aggregate output the welfare consequences of the uncertain aggregate productivity and money supply are also examined

market structure and price flexibility abstract the relationship between market form and price adjustment patterns is examined by using disaggregated price data for mexico over the 1940 1984 period frequency of price adjustment and characteristics of goods and industries appear to be related as predicted by menu cost and customer market models the pattern of response followed by individual prices to inflationary shocks is related to their frequency of price adjustment the typical pattern of response to small and large shocks may differ contrary to predictions based on models with overlapping contracts in addition the empirical results have implications for the relationship between inflation and relative price variability

a critical review of china s rapidly developing renewable energy and energy efficiency policies renewable energy and energy efficiency reee policies have far reaching implications for energy security climate change economic competitiveness pollution and human livelihood for these reasons reee has become a national priority for the chinese government particularly since 2005 this paper aims to critically review china s reee policies in six sectors electricity industry transportation buildings and local government in addition to examining the progress china has made in the development and implementation of reee policies this review also identifies limitations and room for improvement finally five policy recommendations are presented

optimal price setting with observation and menu costs we study the price setting problem of a firm in the presence of both observation and menu costs in this problem the firm optimally decides when to collect costly information on the adequacy of its price an activity which we refer to as a price review upon each review the firm chooses whether to adjust its price subject to a menu cost and when to conduct the next price review this behavior is consistent with recent survey evidence documenting that firms revise prices infrequently and that only a few price revisions yield a price adjustment the goal of the paper is to study how the firm s choices map into several observable statistics depending on the level and relative magnitude of the observation vs the menu cost the observable statistics are the frequency of price reviews the frequency of price adjustments the size distribution of price adjustments and the shape of the hazard rate of price adjustments we provide an analytical characterization of the firm s decisions and a mapping from the structural parameters to the observable statistics we compare these statistics with the ones obtained for the models with only one type of cost the predictions of the model can with suitable data be used to quantify the importance of the menu cost vs the information cost we also consider a version of the model where several price adjustment are allowed between observations a form of price plans or indexation we find that no indexation is optimal for small inflation rates

frequent price changes under menu costs abstract this paper investigates the effect of uncertainty on a single firm s pricing behaviour in a dynamic menu cost model that results in s s rules where the price is fixed inside a band it will be demonstrated that even though the band of inaction widens in response to increased uncertainty the price may be changed more frequent in the short run and in the long run it definitely will hence observing frequent price changes is not necessarily inconsistent with a firm operating under menu costs this paper relies on an article by dixit 1991 review of economic studies 58 141 151 but it offers a different solution technique in particular the solution of the model will be derived explicitly unlike dixit where approximations are resorted to

inflation and relative price variability abstract the unconditional variance of the rate of nominal price change can always be expressed as a function of the unconditional mean therefore the relationship between the unconditional variance and the unconditional mean cannot be used to distinguish among alternative theories

public policy influence on renewable energy investments a panel data study across oecd countries this paper examines the impact of public policy measures on renewable energy re investments in electricity generating capacity made by institutional investors using a novel combination of datasets and a longitudinal research design we investigate the influence of different policy measures in a sample of oecd countries to suggest an effective policy mix which could tackle failures in the market for clean energy the results call for technology specific policies which take into account actual market conditions and technology maturity to improve the conditions for institutional investments advisable policy instruments include economic and fiscal incentives such as feed in tariffs fit especially for less mature technologies additionally market based instruments such as greenhouse gas ghg emission trading systems for mature technologies should be included these policy measures directly impact the risk and return structure of re projects supplementing these with regulatory measures such as codes and standards e g rps and long term strategic planning could further strengthen the context for re investments

optimum pricing policy under stochastic inflation we describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero where the times spent in each state are of random duration this class of processes includes two state markov chains and renewal processes as special cases it is shown that the optimal pricing policy of a monopolistic firm with non convex costs of price adjustment is s s in its real price i e its nominal price relative to the price level a basic certainty equivalence result is proved i e the firm behaves as if it faces a certain and fixed rate of inflation higher than the actual expected rate the difference between the two rates being a risk premium which depends on the real interest rate and the parameters of the stochastic process one can thus apply previous results from the case of certainty sheshinski and weiss review of economic studies 1977 to obtain comparative static results in particular one finds that an increase in the variance of expected inflation leads firms to choose a pricing policy with larger amplitude in real price the paper also addresses the question of consistency in firms expectations when the price level is determined by the firms actions in this paper we consider pricing policies of individual firms in an inflationary environment each firm expects the general price level to increase and must determine the rate of increase of its own price it is assumed that the firm incurs an adjustment cost when it changes its nominal price consequently firms choose to change prices occasionally rather than continuously

linking individual and aggregate price changes this paper studies the implications of lumpiness and heterogeneity in microeconomic pricing decisions for dynamics in price aggregates to capture the latent deviation between actual and target prices it develops a semi structural empirical model of two sided s s price setting applying the model to a unique panel of store level retail prices reveals that fluctuations in the shape of cross sectional price deviation densities contain extra information on aggregate price change dynamics asymmetry in the density particularly matters idiosyncratic shocks magnify the size but do not alter the direction of aggregate fluctuations when the target price is proxied by the cross store mean price the link between inflation and the price deviation density disappears

drivers of green bond market growth the importance of nationally determined contributions to the paris agreement and implications for sustainability abstract green bonds are increasingly being applied to finance emissions reductions sustainable development and other cleaner production investments conducive to reaching the 2 c temperature target of the paris agreement as their markets are relatively nascent there is a gap in the empirical literature on the drivers of green bond market growth to assess the impact that capital market growth drivers and nationally determined contributions to the paris agreement have on green bond issuance volumes as indicators of market growth this study employed a structural equation model using a panel dataset of over 300 billion in green bonds issued in 49 countries between 2007 and 2017 this is the first econometric study to demonstrate unique drivers of green bond market growth in addition to factors that similarly affect conventional bond market growth this is also the first study to construct a normalized index of nationally determined contributions robustness scores to measure their impacts on green bond market growth macroeconomic latent factors exerted three times the total influence exerted by institutional latent factors institutional effects are positive and indirect while oecd membership impacts were small and statistically insignificant nationally determined contributions scores exerted the largest positive and statistically significant impacts among observed variables these results suggest that nationally determined contributions and other macroeconomic and institutional factors are driving growing green bond issuances that will finance climate and sustainability investments through the future they also highlight the need for broader examinations of the determinants of green bond issuances as investment vehicles for sustainable outcomes

economies of scale and utilization in electricity generation in kuwait cost structure of electricity generation in kuwait has been examined with specific focus on the economies of scale and utilization this has been done by estimating a translog variable cost function using time series data covering the period from 1965 to 1990 the results indicate the existence of diseconomies of scale in the generation of electricity but no economies or diseconomies of utilization

holiday price rigidity and cost of price adjustment the thanksgiving christmas holiday period is a major sales period for us retailers due to higher store traffic tasks such as restocking shelves handling customers questions and inquiries running cash registers cleaning and bagging become more urgent during holidays as a result the holiday period opportunity cost of price adjustment may increase dramatically for retail stores which should lead to greater price rigidity during holidays we test this prediction using weekly retail scanner price data from a major midwestern supermarket chain we find that indeed prices are more rigid during holiday periods than non holiday periods for example the econometric model we estimate suggests that the probability of a price change is lower during holiday periods even after accounting for cost changes moreover we find that the probability of a price change increases with the size of the cost change during both the holiday as well as non holiday periods we argue that these findings are best explained by higher price adjustment costs menu cost the retailers face during the holiday periods our data provides a natural experiment for studying variation in price rigidity because most aspects of market environment such as market structure industry concentration the nature of long term relationships contractual arrangements etc do not vary between holiday and nonholiday periods we therefore are able to rule out these commonly used alternative explanations for the price rigidity and conclude that the menu cost theory offers the best explanation for the holiday period price rigidity

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

adoption of solar and wind energy the roles of carbon pricing and aggregate policy support abstract this paper analyzes the roles of policies and preferences in national adoption of solar and wind energy technologies we use cross sectional and panel regressions for both the european union and a broader international sample we find that countries that price carbon emissions have gone on to adopt more solar and wind energy the aggregate level of policy support measured in euros per megawatt hour appears to have been important for solar energy adoption we also find that solar energy adoption has been larger in countries with higher proportions of people concerned about climate change in addition we assess the effects of other key explanators including financial system size and income levels

the main support mechanisms to finance renewable energy development considering that the major part of greenhouse gases is carbon dioxide there is a global concern aimed at reducing carbon emissions additionally major consumer countries are looking for alternati

why are prices sticky the dynamics of wholesale gasoline prices the menu cost interpretation of sticky prices implies that the probability of a price change should depend on the past history of prices and fundamentals only through the gap between the current price and the frictionless price we find that this prediction is broadly consistent with the behavior of nine philadelphia gasoline wholesalers nevertheless we reject the menu cost model as a literal description of these firms behavior arguing instead that price stickiness arises from strategic considerations of how customers and competitors will react to price changes

the determinants of the cost efficiency of electric generating plants a stochastic frontier approach this article provides a detailed analysis of generation plant operating cost efficiency over the period 1988 1997 i estimate a stochastic frontier cost function together with a model of plant inefficiencies to measure the operating efficiencies of individual plants and identify factors that are associated with variations in plant efficiencies i find evidence that plant efficiencies are associated with capacity utilization of the plant the number of plants under utility management and ownership form i also find that regulatory restructuring activity in certain states is associated with improvements in plant operating performance the purpose of this article is to provide a detailed analysis of the operating cost efficiencies of electricity generating plants over the period 1988 1997 i estimate the operating efficiencies of fossil fueled steam generating plants and examine factors that influence plant operating performance i use the estimation procedure of battese and coelli 1995 to simultaneously estimate a stochastic frontier cost function and a function relating plant efficiency levels to plant specific factors and other explanatory variables a comprehensive data set allows me to investigate the influence of capacity utilization ownership form and utility experience on plant efficiency levels since significant regulatory change in the electricity industry had begun during this time period i also investigate the impact of state level regulatory change on plant operating efficiency a number of authors have analyzed the efficiencies of electricity generating plants relative to a best practice frontier including kopp and smith 1980 schmidt and lovell 1979 stevenson 1980 cote 1989 reifschneider and stevenson 1991 hammond 1992 pollitt 1995 and fire grosskopf and logan 1983 1985 these studies find considerable evidence of inefficiency in electricity generation during the 1960s and 1970s the present study provides more recent information regarding generating plant efficiencies during a period of significant regulatory and structural change studies investigating the determinants of power plant departures from the frontier have focused primarily on the effects of ownership mode pollitt 1995 provides a comprehensive review of these studies reifschneider and stevenson 1991 examine the impact on cost efficiency of a number of variables including the capacity utilization of the firm s generating facilities more recently knittel 2001 examines the impact of incentive regulation on plant efficiency levels steiner

state dependent pricing and the general equilibrium dynamics of money and output economists have long suggested that nominal product prices are changed infrequently because of fixed costs in such a setting optimal price adjustment should depend on the state of the economy yet while widely discussed statedependent pricing has proved difficult to incorporate into macroeconomic models this paper develops a new tractable theoretical state dependent pricing framework we use it to study how optimal pricing depends on the persistence of monetary shocks the elasticities of labor supply and goods demand and the interest sensitivity of money demand

menu costs entry deterrence and nominal rigidity this paper studies in a model of entry deterrence conditions under which a small cost of changing nominal prices combined with a real rigidity leads to a large nominal rigidity the entry deterrence environment which generates the real rigidity provides an appealing explanation as to why firms sometimes react to shocks by changing output instead of prices as in ball and romer 1990 a large nominal rigidity arises with some parameter values it is not however monotonically increasing as real prices become more rigid the paper studies in a model of entry deterrence conditions under which a small cost of changing nominal prices combined with a real rigidity leads to a large nominal rigidity the entry deterrence environment which generates the real rigidity provides an appealing explanation as to why firms sometimes react to shocks by changing output instead of prices as in ball and romer 1990 a large nominal rigidity arises with some parameter values it is not however monotonically increasing as real prices become more rigid

magazine prices revisited this paper examines price adjustment behaviour in the magazine industry in a frequently cited study cecchetti 1986 constructs a reduced form s s model for firms cecchetti assumes that a firm s pricing rules are fixed for non overlapping three year intervals and estimates the model using a conditional logit specification from chamberlain 1980 the estimates are inconsistent however due to the duration dependent specification of the model two alternative specifications are used to obtain consistent estimation the consistent estimates continue to provide strong evidence in favour of state dependent pricing models but only weak evidence on the behaviour of price adjustment costs copyright 2006 john wiley sons ltd

the efficiency wage hypothesis a mesoeconomic analysis abstract in this paper we apply the mesoeconomic approach to examine the efficiency wage hypothesis with the traditional formulation of the efficiency wage hypothesis we show that under certain conditions the economy has a continuum of equilibria and that nominal shocks can have real effects depending on the firms expectations with a modified formulation of the efficiency wage hypothesis and increasing return to scale we capture the weak positive correlation between real wage and employment and show that nominal shocks may have real effects in an economy without a continuum of equilibria

privatisation and the efficiency of decentralised electricity generation some evidence from inter war britain the privatization of the electricity supply industry in england and wales has established a decentralized system of supply this paper considers the efficiency of the decentralized interwar electricity supply industry a generalized stochastic frontier cost function is specificed enabling the estimation of returns to scale and inefficiency at plant level these estimates are used in turn to examine the efficiency of stations selected by the central electricity board to supply the national grid the results imply that a decentralized system was not only feasible but that the selection procedure was sensitive to efficiency differences at plant level copyright 1992 by royal economic society

the dynamics of gasoline prices evidence from daily french micro data using millions of individual gasoline prices collected at a daily frequency we examine the speed at which market prices of refined oil are transmitted to retail gasoline prices in france for that we estimate a reduced form model of state dependent pricing where thresholds triggering price changes are allowed to vary over time and depend on the duration since the last price change we find that the degree of pass through of wholesale prices to retail gasoline prices is on average 0 77 for diesel and 0 67 for petrol and depend on local market characteristics the duration for a shock to be fully transmitted into prices is about 10 days there is no significant asymmetry in the transmission of wholesale price to retail prices finally the duration since the last price change has a significant effect on thresholds triggering price changes but a large variance of idiosyncratic shocks on thresholds is also crucial to replicate the size distribution of price changes

on endogenously staggered prices taylor s model of staggered contracts is an influential explanation for nominal inertia and the persistent real effects of nominal shocks however in standard imperfect competition models if agents are allowed to choose the timing of pricing decisions they will typically choose to synchronize this paper provides a simple model of imperfect competition which produces stable staggering our argument relies on strategic interaction at two levels between firms within an industries and across industries and produces a continuum of staggered price equilibria these equilibria are strict and hence stable under a simple adaptive learning process an enduring problem for business cycle theory is an explanation for the persistent effects of nominal shocks explaining persistence is particularly problematic for theories based on nominal shocks as opposed to real shocks this is because rational expectations implies that nominal shocks themselves cannot be serially correlated since nominal shocks are the deviation of realized nominal magnitudes from expected values in two important papers taylor 1979 1980 provided an argument as to why a nominal shock can have persistent effects taylor s argument required two important assumptions first he assumed that firms could adjust prices only in alternate periods an assumption which may be justified by menu or information costs taylor s second assumption was that price setting was staggered half the firms were constrained to adjust prices in odd periods while the other half were allowed to adjust prices in even periods these two assumptions combined to provide dramatic results on nominal inertia the adjustment of prices to a nominal shock is slow and hence output effects are long lasting taylor s results on persistence arise due to strategic complementarity between price setting decisions this implies that each firm s optimal price is an increasing function of the aggregate price level if a shock arrives in an even period firms in the even cohort will not adjust fully to the nominal shock since firms in the odd cohort have fixed prices in the current period furthermore with rational expectations the even cohort also takes into account the fact that its own failure to adjust fully will also make for partial adjustment in future periods this elegant story has made taylor s model possibly the most influential of new keynesian models by providing a dynamic setting within which small nominal rigidities may result in persistent nominal inertia

price adjustment in an automobile insurance market a test of the sheshinski weiss model nominal price rigidity is explained in the sheshinski weiss sw model by costly price adjustment the predictions of the sw model which describe a firm s optimal forward looking price adjustment strategy were derived and tested using microdata on the timing and the magnitude of premium changes by sixty nine firms in the alberta automobile insurance market over the period 1974 82 the model was tested by estimating the structural equations of the model probit equations for premium changes and reduced form equations for the firm s new premium and its old premium the overall conclusion is that the sw model does not explain the price adjustments observed in the alberta automobile insurance market