An Inquiry into the Existence and Uniqueness of Equilibrium with State-Dependent Pricing

71 Pages Posted: 5 Dec 2012

See all articles by A. Andrew John

A. Andrew John

Melbourne Business School

Alexander L. Wolman

Federal Reserve Bank of Richmond

Date Written: April 1, 2004

Abstract

State-dependent pricing models are now an operational framework for quantitative business cycle analysis. The analysis in Ball and Romer (1991), however, suggests that such models may be rife with multiple equilibria: in their static model price adjustment is always characterized by complementarity, a necessary condition for multiplicity. We study existence and uniqueness of equilibrium in a discrete-time state-dependent pricing model. In steady states of our model, we find only weak complementarity and no evidence of multiplicity. We likewise find no evidence of multiplicity in the presence of monetary shocks. However, nonexistence of symmetric steady-state equilibrium with pure strategies arises in a small region of the parameter space.

Keywords: price adjustment, menu costs, state-dependent pricing, multiple equilibria

JEL Classification: E31, E32, C62

Suggested Citation

John, A. Andrew and Wolman, Alexander L., An Inquiry into the Existence and Uniqueness of Equilibrium with State-Dependent Pricing (April 1, 2004). FRB Richmond Working Paper No. 04-04. Available at SSRN: https://ssrn.com/abstract=2184957 or http://dx.doi.org/10.2139/ssrn.2184957

A. Andrew John

Melbourne Business School ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Alexander L. Wolman (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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