Working Paper: CEPR ID: DP2917
Authors: Michael B. Devereux; James Yetman
Abstract: This Paper illustrates a model of predetermined pricing based on the work of Fischer (1977), where firms set a fixed schedule of nominal prices at the time of price readjustment. This type of price-setting specification cannot produce any excess persistence in a fixed duration model of staggered prices. But we show that with a probabilistic model of price adjustment, as in Calvo (1983), a predetermined pricing specification can produce excess persistence. Moreover, in response to a money shock, the aggregate dynamics are very similar to those under a specification of fixed prices, the assumption underlying most recent dynamic sticky-price models.
Keywords: money shocks; predetermined prices; sticky prices
JEL Codes: E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| money shocks (E41) | output persistence (C67) |
| predetermined pricing (PP) model (L11) | excess persistence in response to money shocks (E19) |
| predetermined pricing (PP) model (L11) | different prices for future periods (G13) |
| elasticity of real marginal cost to output = 1 and money follows a random walk (E19) | equivalent aggregate dynamics for PP and FP models (C69) |
| real rigidity low (D50) | greater immediate impacts on output (F69) |
| real rigidity high (C54) | more persistence in output response (C69) |
| predetermined pricing (PP) model (L11) | flexible price setting across periods (P22) |