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

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

wages relative prices and the choice between fixed and flexible exchange rates this paper reexamines the choice between fixed and flexible exchange rates to take into account wage indexation and flexible prices the difference in output variation in the two exchange rate regimes is shown to be dependent on wage behaviour in the domestic economy being proportional to one minus the degree of wage indexation foreign wage behaviour is also shown to be of key importance since high wage indexation abroad can insulate the domestic country from some foreign disturbances regardless of domestic behaviour while for other economic disturbances it is the relative degree of wage indexation which determines the desirability of flexible rates niveaux de salaires prix relatifs et le choix entre les regimes de taux de change fixes ouflucttuants ce memoire reouvre le dossier du choix entre regime de taux de change fixes et regime de taux de change fluctuants quand on tient compte de l indexation des salaires et de la flexibilite des prix il appert que l ecart entre les variations du niveau de production domestique entre les deux regimes depend du comportement des salaires dans l economie domestique il est proportionnel a 1 le degre d indexation des salaires le comportement des salaires dans le reste du monde est aussi important puisque un haut degre d indexation des salaires dans le reste du monde peut proteger l economie domestique de certaines perturbations economiques h l etranger quel que soit le comportement des salaires domestiques dans le cas d autres perturbations economiques c est le degre relatif d indexation des salaires h l interieur et h l exterieur qui devient le facteur determinant dans le choix d un regime de taux de change how much difference a flexible exchange rate makes to the economic performance of a country depends significantly on wage behaviour if wages are sufficiently sensitive to exchange rates output will exhibit much the same variability under flexible exchange rates as under fixed rates foreign wage behaviour is also of key importance since high wage flexibility abroad can insulate the domestic country from some foreign disturbances regardless of domestic wage behaviour while for other economic disturbances it is the relative degree of wage flexibility which determines the desirability of flexible rates this paper re examines the choice between fixed and flexible rates taking into account both domestic and foreign wage

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

measuring the cost of time in recreation demand analysis comment in the february 1981 issue of the journal mcconnell and strand present a model of recreation demand in which the opportunity cost of an hour of travel to a recreation site is assumed not to equal the average hourly income of the recreating family they test the model with data from a 1978 survey of sportfishermen in the chesapeake bay region simply stated the model hypothesizes that the sportfishermen will behave as if the price of a recreational trip is the sum of cash costs and the opportunity cost of travel time this opportunity cost is hypothesized to be some ratio k of average family income per hour times the travel time mcconnell and strand estimate the value of k by regressing recreation days against cash costs and opportunity cost of time as separate variables the ratio of regression coefficients then is an estimate of k they go on to estimate the ratio k of the opportunity cost of travel to the average income for sportfishermen in the chesapeake bay region the authors hypothesize that the ratio k falls between 0 and 1 implying that sportfishermen value the time in transit lower than their average income when working sufficient conditions for k to equal one include a the tax rate is zero b marginal earnings are constant and c nonwork income equals zero this comment is written to point out certain aspects of the study which may have led to an underestimation of the value of k it is argued that mcconnell and strand have misspecified their demand equation in such a way that their estimate for k 612 is biased downward mcconnell and strand hypothesize the demand relation

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

reconciling models of recreational route and site choices when employing travel cost models the unit cost of the essential input travel in the household s production of a recreation experience is central to obtaining the preference structure for the recreational good however little attention has been given to the choice of the route although the route defines the monetary and time costs used to compute travel costs conventional wisdom considers time and money costs in determining the cost per mile in the estimation of site choices but does not use both in determining the route choices and mileages this paper investigates whether models of recreational site and route choices can be reconciled

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

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

aspects of the optimal management of exchange rates abstract this paper shows that the choice of the optimal exchange rate regime depends on the stochastic shocks affecting the economy the higher the variance of real shocks the larger the desirability of fixity of exchange rates the desirability of exchange rate flexibility increases the larger are the variances of the shocks to the demand for money to the supply of money to foreign prices and to purchasing power parities when the economy produces traded and non traded goods the desirability of exchange rate flexibility diminishes the higher is the relative share of non traded goods and the lower are the elasticities of demand and supply of the two goods

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

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

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

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

willingness to pay for snowmobile recreation travel cost method models with and without post season resurvey of trip count annual willingness to pay wtp for snowmobile recreation in idaho is estimated using the travel cost method tcm on site snow conditions are important and erratic thus we collect two measures o

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

optimal wage indexation and monetary policy in an economy with imported raw materials abstract an economy s openness from the input side has important effects on the optimal design of its macroeconomic policies given the exchange rate regime the larger the share of imported raw materials in domestic production the smaller the optimal degree of wage indexation to unanticipated inflation alternatively given the wage indexation parameter the larger the share of imported raw materials in domestic production the smaller the optimal degree of foreign exchange intervention by the monetary authority the more flexible the exchange rate

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

specification of driving costs in models of recreation demand existing recreation demand models have paid much attention to the heterogeneous nature of the opportunity cost of time but generally stipulate constant per mile costs in access price specifications this study proposes two alternative approaches to introduce user specific driving costs into recreation demand models the first approach is based on a refined measurement of driving costs based on engineering considerations the second strategy estimates perceived per mile cost as a function of vehicle attributes in an empirical framework we find strong evidence that driving costs are a visitor specific concept and that prescribed and perceived costs differ substantially however welfare measures generated by these alternative specifications are not statistically different from those produced by the standard model in our application of jet skiing in the lake tahoe region

specification considerations for the price variable in travel cost demand models the travel cost method tcm which is used to impute a value to outdoor recreation resources has traditionally examined the statistical relationship between visit rates to a site and the observed variable travel cost per visit users of the tcm then typically use that statistical relationship to infer a demand relation between visit rates and a schedule of unobserved entry fees in using data on these observed travel costs to infer a behavioral response to unobserved entry fees the tcm will only generate an unbiased estimate of consumer surplus accruing to site visitors in certain circumstances specifically assuming linearity it is required that the estimated linear coefficient bk explaining visits as a function of observed travel costs r f r is equal to the unobserved coefficient bp which explains visits as a function of entry fees price unfortunately nothing guarantees that bc is the same as bp thus in order to obtain an unbiased esti

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

endogenously chosen travel costs and the travel cost model an application to mountain biking at moab utah the travel cost model is frequently used to estimate net willingness to pay for recreation at remote sites by using the visitor s travel costs as a proxy for the price of recreation however some concern has been raised over the validity of using the visitor s stated travel costs as a proxy for price this paper addresses some of these concerns by examining the possible over estimation of consumer surplus due to endogenously chosen travel costs this paper extends past theoretical work for the linear model by developing a correction for endogenously chosen travel costs in more commonly used nonlinear models such as the poisson or count data model also provided is the first empirical test of the presence of endogeneity and an estimate of the magnitude of the error from ignoring endogeneity in travel costs after applying this test and the correction to data that was gathered for mountain biking at moab utah the estimate of consumer surplus falls from us 153 to us 135 which is a 12 reduction

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

openness relative prices and macro policies abstract this paper analyzes the role of relative prices in the conduct of wage indexation monetary policy and exchange rate policy in a small economy producing traded and nontraded goods under a managed float exchange rate regime it is shown that the beneficial effect of using relative prices in addition to aggregate prices as indicators for the conduct of the above policies increases with openness the response of policies to relative prices rises with openness and has dampening effects on the volatility of deviations from purchasing power parity

stabilization with wage indexation and exchange rate flexibility abstract this survey examines the role of wage indexation and exchange rate policy in dampening fluctuations in output around its target level it is demonstrated that the appropriate choice for wage indexation and exchange rate flexibility is highly sensitive to the nature and the relative importance of the shocks impinging upon the economy as well as to the relevant parameters in the economy moreover the question of the desired flexibility of the exchange rate should be studied in the context of wage indexation and vice versa this interdependence raises the possibility of both policies being complements or substitutes to each other depending on the number of shocks that perturb the economy

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

an extension of omitted cross price variable biases in the linear travel cost model correcting common misperceptions caulkins bishop and bouwes cbb 1985 raise an important issue concerning the conventional presumption of positive bias in consumer surplus when alternative sites are ignored in the travel cost method treatment of site value dwyer kelly and bowes 1977 they analyze a significant geographic dispersion phenomenon which can cause either negative or positive bias in travel cost model tcm estimates of site value when travel costs to alternative sites are omitted however the derivation of specification bias in the tcm which they provide is incomplete and could lead to generalizations which are erroneous cbb use the well known specification bias analysis to discuss the possible effects of ignoring alternative recreation sites in the tcm demand analysis given the estimated linear regression equation

the transmission of disturbances under alternative exchange rate regimes with optimal indexing the paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange rate systems uniform flexible exchange rates uniform fixed exchange rates and two versions of two tier exchange rates the analysis makes two general points first one cannot assume stability of structure when assessing the consequences of alternative exchange rate regimes for example the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the government s choice of exchange rate regime second exchange rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare

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

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 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

wage flexibility and openness this paper analyzes the degree of short run real wage flexibility in a two sector economy under floating rates this is done by deriving optimal wage indexation in a contracting framework we find that the more closed the economy the lower the degree of wage indexation as a result output will fluctuate less around its desired level in a more closed economy these findings further imply that a given unexpected monetary shock will cause as maller output shock in a more open economy whereas a given real shock will induce a smaller output shock in a more closed economy this abstract was borrowed from another version of this item

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

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

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

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

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

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

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

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

on the commodity value of travel time in recreational activities the allocation of individual time can have a commodity value if the use of time is enjoyable this paper investigates the commodity value of travel time in recreational activities the study focuses on recreational boating in east texas after specifying a model of multisite recreational demand for boating the commodity value of travel time to each site is estimated implications of the results for the analysis of outdoor recreation are discussed

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

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

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