Some Evolutionary Foundations for Price Level Rigidity

24 Pages Posted: 28 Jun 2002

See all articles by Gilles Saint-Paul

Gilles Saint-Paul

University of Toulouse I - GREMAQ-IDEI; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2002


This paper shows that price rigidity evolves in an economy populated by imperfectly rational agents who experiment with alternative rules of thumb. In the model, firms must set their prices in face of aggregate demand shocks. Their payoff depends on the level of aggregate demand, as well as on their own price and their neighbor's price. The latter assumption captures local interactions. Despite the fact that the rational expectations equilibrium (REE) is characterized by a simple pricing rule that firms can easily adopt, the economy does not converge to the REE for highly autocorrelated aggregate demand shocks and a high level of local interaction. Instead, the aggregate price level exhibits rigidity, in that it does not fully react to contemporaneous aggregate demand shocks, and inertia, in that controlling to it positively depends on its past value. We show that local interactions and serial correlation of aggregate demand shocks play a key role in generating those results.

Keywords: Evolution, Bounded Rationality Adaptive Learning, Experimentation, Externalities, Spillovers, Local Interaction, Money, Aggregate Demand, Price Rigidity, Rational Expectations, Monetary Policy, Macroeconomic Fluctuations

JEL Classification: E3, D83, D84

Suggested Citation

Saint-Paul, Gilles, Some Evolutionary Foundations for Price Level Rigidity (May 2002). CESifo Working Paper Series No. 720. Available at SSRN:

Gilles Saint-Paul (Contact Author)

University of Toulouse I - GREMAQ-IDEI ( email )

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
+33 5 6112 8544 (Phone)
+33 5 6122 5563 (Fax)

Centre for Economic Policy Research (CEPR)

United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics