Working Paper: CEPR ID: DP5535
Authors: Mark Weder
Abstract: The aim of the present paper is to analyze the link between price rigidity and indeterminacy. This is done within a cash-in-advance economy from which we know that it exhibits indeterminacy at high degrees of relative risk aversion. I find that price stickiness reduces the scope of these sunspot equilibria: sluggish price adjustment requires degrees of relative risk aversion compatible with indeterminacy that prove too high to square with data.
Keywords: Calvo pricing; cash-in-advance economies; sunspot equilibria
JEL Codes: E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price stickiness (E31) | Reduction in the likelihood of sunspot equilibria (C62) |
| Price flexibility (D41) | Specific threshold of relative risk aversion (D11) |
| Complete price stickiness (D41) | Indeterminacy is no longer possible (D81) |
| Increased price stickiness (E31) | Raises the critical value of relative risk aversion (D11) |
| Price stickiness (E31) | Mitigates the effects of sunspots (E32) |
| Critical value of relative risk aversion (D81) | Affects the relationship between price stickiness and occurrence of indeterminacy (C54) |