Working Paper: NBER ID: w30193
Authors: Fernando E. Alvarez; Francesco Lippi; Takis Souganidis
Abstract: We study the propagation of monetary shocks in a sticky-price general-equilibrium economy where the firms’ pricing strategy feature a complementarity with the decisions of other firms. In a dynamic equilibrium the firm’s price-setting decisions depend on aggregates, which in turn depend on firms’ decisions. We cast this fixed-point problem as a Mean Field Game and establish several analytic results. We study existence and uniqueness of the equilibrium and characterize the impulse response function (IRF) of output following an aggregate “MIT” shock. We prove that strategic complementarities make the IRF larger at each horizon, in a convex fashion. We establish that complementarities may give rise to an IRF with a hump-shaped profile. As the complementarity becomes large enough the IRF diverges and at a critical point there is no equilibrium. Finally, we show that the amplification effect of the strategic interactions is similar across models. For instance, the Calvo model and the Golosov-Lucas model display a comparable amplification, in spite of the fact that the non-neutrality in Calvo is much larger.
Keywords: No keywords provided
JEL Codes: E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Strategic Complementarities (L19) | Impulse Response Function (IRF) of Output (D57) |
| High Strategic Complementarity (L19) | IRF Exhibits Hump-Shaped Profile (H31) |
| Critical Threshold of Strategic Complementarity (L15) | Equilibrium Ceases to Exist (D59) |
| Strategic Interactions (C72) | Aggregate Dynamics (E10) |
| Cumulative Impulse Response (CIR) (C22) | Amplified Across Different Models (C59) |