Aggregate Dynamics with Heterogeneous Agents and State-Dependent Pricing
CDMA Working Paper No. 0505
46 Pages Posted: 10 Jun 2005
Date Written: June 2005
Abstract
This paper examines the consequences of (S, s) pricing rules in a dynamic economy with heterogeneous costs of price adjustment. We construct the stationary distributions for aggregate output and prices for our model economy. As a result of our assumption of heterogeneous costs we find that: (i) Some sectors change prices more regularly than others; (ii) Price changes are asynchronized (relative prices may be moving in opposite directions in different sectors); (iii) The economy may be more sensitive to demand shocks. There is broad empirical support for the predictions of the model.
Keywords: Price rigidity, (S, s) pricing, macroeconomic dynamics
JEL Classification: E31, E32, E37, E58
Suggested Citation: Suggested Citation
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