Chapter 11 Imperfect Competition and Real and Nominal Price Rigidity
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Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy
Review of Economic Studies (1993) 60, 95-119 0034-6527/93/00050095$02.00 ? 1993 The Review of Economic Studies Limited Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy RICARDO J. CABALLERO M.I.T and N.B.E.R and EDUARDO M. R. A. ENGEL Harvard University and Universidad de Chile First version received May 1990; final version accepted January 1992 (Eds.) When firms face menu costs, the relation between their output and money is highly non-linear. At the aggregate level, however, this needs not be so. In this paper we study the dynamic behaviour of a menu-cost economy where firms are heterogeneous in the shocks they perceive, and the demands and adjustment costs they face. In this context we (i) generalize the Caplin and Spulber (1987) steady-state monetary-neutrality result; (ii) show that uniqueness of equilibria depends not only on the degree of strategic complementarities but also on the degree of dispersion of firms' positions in their price-cycle; (iii) characterize the path of output outside the steady state and show that as strategic complementarities become more important, expansions become longer and smoother than contractions; and (iv) show that the potential impact of monetary shocks is an increasing function of the distance of the economy from its steady state, but that an uninformed policy maker will have no effect on output on average. 1. INTRODUCTION An important part of the debate on the response of prices to monetary shocks has centred on the dynamic discrepancy between economies with and without price rigidities, on the magnitude and persistence of these discrepancies, and on whether the monetary authority should attempt to exploit rigidities or not. -
Wage Determination and Imperfect Competition
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Booth, Alison L. Working Paper Wage Determination and Imperfect Competition IZA Discussion Papers, No. 8034 Provided in Cooperation with: IZA – Institute of Labor Economics Suggested Citation: Booth, Alison L. (2014) : Wage Determination and Imperfect Competition, IZA Discussion Papers, No. 8034, Institute for the Study of Labor (IZA), Bonn This Version is available at: http://hdl.handle.net/10419/96758 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu IZA DP No. 8034 Wage Determination and Imperfect Competition Alison Booth March 2014 DISCUSSION PAPER SERIES Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor Wage Determination and Imperfect Competition Alison Booth Australian National University and IZA Discussion Paper No. -
Inventories, Markups, and Real Rigidities in Menu Cost Models∗
Inventories, Markups, and Real Rigidities in Menu Cost Models∗ Oleksiy Kryvtsov Virgiliu Midrigany Bank of Canada New York University January 2009 Abstract Real rigidities that limit the responsiveness of real marginal cost to output are a key ingredient of sticky price models necessary to account for the dynamics of output and inflation. We argue here, in the spirit of Bils and Kahn (2000), that the behavior of marginal cost over the cycle is directly related to that of inventories, data on which is readily available. We study a menu cost economy in which firms hold inventories in order to avoid stockouts and to economize on fixed ordering costs. We find that, for low rates of depreciation similar to those in the data, inventories are highly sensitive to changes in the cost of holding and acquiring them over the cycle. This implies that the model requires an elasticity of real marginal cost to output approximately equal to the inverse of the elasticity of intertemporal substitution in order to account for the countercyclical inventory-to-sales ratio in the data. Stronger real rigidities lower the cost of acquiring and holding inventories during booms and counterfactually predict a procyclical inventory-to-sales ratio. JEL classifications: E31, F12. Keywords: Inventory, menu costs, real rigidities. ∗The views expressed here are those of the authors and do not reflect those of the Bank of Canada. We thank George Alessandria, Mike Dotsey, Mark Getler, Boyan Jovanovic, James Kahn and Huntley Schaller for useful discussions, as well as seminar participants at the NBER-SITE Price Dynamics Conference at Stanford, Duke Macroeconomics Jamboree, Universit´edu Qu´ebec `aMontr´eal,Universit´ede Montr´eal,Universit´eLaval, University of Western Ontario, Chicago GSB, Federal Reserve Board, the Federal Reserve Banks of Atlanta, Philadelphia, Richmond and St. -
Nominal Rigidity and Some New Evidence on the New Keynesian Theory of the Output-Inflation Tradeoff Rongrong Sun1
Munich Personal RePEc Archive Nominal Rigidity and Some New Evidence on the New Keynesian Theory of the Output-Inflation Tradeoff Sun, Rongrong University of Wuppertal 2012 Online at https://mpra.ub.uni-muenchen.de/45021/ MPRA Paper No. 45021, posted 15 Mar 2013 06:19 UTC Nominal Rigidity and Some New Evidence on the New Keynesian Theory of the Output-Inflation Tradeoff Rongrong Sun1 Abstract: This paper develops a series of tests to check whether the New Keynesian nominal rigidity hypothesis on the output-inflation tradeoff withstands new evidence. In so doing, I summarize and evaluate different estimation methods that have been applied in the literature to address this hypothesis. Both cross-country and over-time variations in the output-inflation tradeoff are checked with the tests that differentiate the effects on the tradeoff that are attributable to nominal rigidity (the New Keynesian argument) from those ascribable to variance in nominal growth (the alternative new classical explanation). I find that in line with the New Keynesian hypothesis, nominal rigidity is an important determinant of the tradeoff. Given less rigid prices in high-inflation environments, changes in nominal demand are transmitted to quicker and larger movements in prices and lead to smaller fluctuations in the real economy. The tradeoff between output and inflation is hence smaller. Key words: the output-inflation tradeoff, nominal rigidity, trend inflation, aggregate variability JEL-Classification: E31, E32, E61 1 Schumpeter School of Business and Economics, University of Wuppertal, [email protected]. I would like to thank Katrin Heinrichs, Jan Klingelhöfer, Ronald Schettkat and the seminar (conference) participants at the Schumpeter School of Business and Economics, the DIW Macroeconometric Workshop 2009, the 2011 meeting of the Swiss Society of Economics and Statistics (SSES) and the 26th Annual Congress of European Economic Association (EEA), 2011 Oslo for their helpful comments. -
Imperfect Competition and Misallocations
Imperfect Competition and Misallocations Yan Liang∗ London School of Economics, CFM Latest version here This version: July 2017 Abstract Misallocation of resources across production units lowers aggregate TFP. The factors driving misallocation can be internal or external to the market structure. Variation in markups asso- ciated with imperfect competition is an internal distortion. Taxes and subsidies on input and output markets are examples of external distortions. The study of India's manufacturing data suggests that more than 80% of the observed misallocation can be attributed to internal dis- tortions. Removing external distortions alone has a modest effect on aggregate TFP. It raises TFP by 14-17%, which is less than one fifth the compound effect of removing both types of distortions. The implication is that fostering competition is more effective to improve allocation efficiency and aggregate TFP. Removing individual external distortions is less effective. JEL Codes: O11, O47, O53. Keywords: Misallocation, Markup, Distortions, Imperfect Competition. ∗First version: May 2014. Department of Economics, and Centre for Macroeconomics, London School of Economics and Political Science, Houghton Street, London WC2A 2AE (e-mail: [email protected]). I am grateful to Francesco Caselli for his invaluable guidance and support. My gratitude extends to Gianmarco Ottaviano, Michael Peters, and seminar participants at LSE, LBS TADC for helpful comments. All errors are my own. 1 1 Introduction A growing literature has pointed out the important role of resource allocation in shaping aggregate productivity. For the allocation to be efficient, it is required that marginal products be equalized across different production units.1 Deviations from this represent misallocation and lead to a low aggregate productivity. -
Imperfect Competition
Imperfect Competition Topics in Public Economics Fall 2017 Outline Competitive Markets and Efficiency Imperfect Competition Concepts of Competition Market Structure Welfare Competitive Markets, Allocation and Efficiency Efficiency: Price mechanism as a means of allocating resources. I When agents are price takers, prices reveal true economic values and act as signals that guide agents to mutually consistent decisions ! Pareto Efficiency I First Fundamental Theorem of Welfare Economics: The competitive equilibrium, where supply equals demand, maximizes social efficiency. First Theorem I Second Fundamental Theorem of Welfare Economics : Society can attain any efficient outcome by suitably redistributing resources among individuals and then allowing them to freely trade. Second Theorem back back Prices and Efficiency I Imperfect competition arises whenever an economic agent has the ability to influence prices. I To be able to do so requires that the agent must be large relative to the size of the market in which they operate. I It follows from the usual application of economic rationality that those agents who can affect prices will aim to do so to their own advantage. I This must be detrimental to other agents and to the economy as a whole ! room for economic policy Outline Competitive Markets and Efficiency Imperfect Competition Concepts of Competition Market Structure Welfare Market Power and Prices I Firms with market power can push prices above competitive level which will hinder efficiency. I It then becomes possible that policy intervention can improve on the unregulated outcome. Outline Competitive Markets and Efficiency Imperfect Competition Concepts of Competition Market Structure Welfare Concepts of Competition I Imperfect competition arises whenever an economic agent exploits the fact that they have the ability to influence the price of a commodity. -
Advanced Topics: Theory of Money ∗
Advanced Topics: Theory of money ∗ Francesco Lippi University of Sassari and EIEF flippi‘at’uniss.it November 20, 2013 The class has two parts. The first part describes models where money has value in equilibrium because of explicitly specified frictions. We use these models to discuss optimal monetary policy. Second, we study the propagation of monetary shocks in an economy with sticky prices. We will use continuous-time stochastic processes and optimal-control methods to model infrequent price adjustment by firms. Emphasis will be placed on the solution methods, mostly analytical, and on quantitative applications. We will solve the firm decision problem under different frictions, discuss aggregation of the individual firm decisions within a GE model, and study the propagation of shocks in an economy populated by “inactive” firms. ∗ 1. Pure currency economies • Samuelson-Lucas OLG (Lucas (1996)) Competitive equilibrium • Lump-sum, proportional • Planner’s problem and welfare analysis • Money in the Utility function, CIA, Sidrausky and Goodfriend-MacCallun type of models, Lucas (2000). • Cost of Inflation with Heterogeneous agents. Money as a buffer stock: Lucas (1980), chapter 13.5 of Stokey and Lucas (1989), Imrohoroglu (1992), Lippi, Ragni, and Trachter (2013) 2. Money in a search and matching environment • Lagos and Wright (2005) model • Individual rationality and implementability of FR (Andolfatto (2013)) • Competing media of exchange Nosal and Rocheteau (2011) Ch. 10 3. Continuous time diffusions, controlled BM and Hamilton-Jacobi-Bellman equations • Chapters 1-4 from Dixit (1993) and Chapters 3 (1, 2 optional) Stokey (2009) • Discrete time - discrete state derivation of BM • Derivation of the Hamilton-Jacobi-Bellman equation • Controlled BM: expected time to hit barrier • Invariant distribution of a controlled diffusion: Kolmogorov equation • The smooth pasting principle 4. -
The Neoclassical Synthesis
Department of Economics- FEA/USP In Search of Lost Time: The Neoclassical Synthesis MICHEL DE VROEY PEDRO GARCIA DUARTE WORKING PAPER SERIES Nº 2012-07 DEPARTMENT OF ECONOMICS, FEA-USP WORKING PAPER Nº 2012-07 In Search of Lost Time: The Neoclassical Synthesis Michel De Vroey ([email protected]) Pedro Garcia Duarte ([email protected]) Abstract: Present-day macroeconomics has sometimes been dubbed ‘the new neoclassical synthesis’, suggesting that it constitutes a reincarnation of the neoclassical synthesis of the 1950s. This paper assesses this understanding. To this end, we examine the contents of the ‘old’ and the ‘new’ neoclassical syntheses. We show that the neoclassical synthesis originally had no fixed content, but two meanings gradually became dominant. First, it designates the program of integrating Keynesian and Walrasian theory. Second, it designates the methodological principle that in macroeconomics it is better to have alternative models geared towards different purposes than a hegemonic general- equilibrium model. The paper documents that: (a) the first program was never achieved; (b) Lucas’s criticisms of Keynesian macroeconomics eventually caused the neoclassical synthesis program to vanish from the scene; (c) the rise of DSGE macroeconomics marked the end of the neoclassical synthesis mark II; and (d) contrary to present-day understanding, the link between the old and the new synthesis is at best weak.. Keywords: neoclassical synthesis; new neoclassical synthesis; Paul Samuelson; Robert Lucas; Robert Solow JEL Codes: B22; B30; E12; E13 IN SEARCH OF LOST TIME: THE NEOCLASSICAL SYNTHESIS Michel De Vroey and Pedro Garcia Duarte ◊ Abstract Present-day macroeconomics has sometimes been dubbed ‘the new neoclassical synthesis’, suggesting that it constitutes a reincarnation of the neoclassical synthesis of the 1950s. -
No. 3 E Version
EUROPEAN NETWORK OF ECONOMIC POLICY RESEARCH INSTITUTES WORKING PAPER NO. 3/MARCH 2001 EUROPEAN LABOUR MARKETS AND THE EURO: HOW MUCH FLEXIBILITY DO WE REALLY NEED? MICHAEL C. BURDA ISBN 92-9079-319-8 © COPYRIGHT 2001, MICHAEL C. BURDA EUROPEAN LABOUR MARKETS AND THE EURO: HOW MUCH FLEXIBILITY DO WE REALLY NEED? ENEPRI WORKING PAPER NO. 3, MARCH 2001 MICHAEL C. BURDA* ABSTRACT Widespread concern over real effects of EMU is consistent with new Keynesian approaches to macroeconomic fluctuations, but more difficult to reconcile with a real business cycle (RBC) paradigm. Using a model with frictions as a point of departure, I speculate that nominal price rigidity in Europe is likely to increase, while real rigidities are likely to decrease, as a consequence of monetary union. This logic implies a new European macroeconomic regime in which monetary policy is increasingly "effective" in influencing output in the short run. Similarly, changes in the nature of real and nominal price determination are likely to increase the volatility of the European business cycle. Empirical evidence of increasing covariation of price inflation and declining correlation of wage inflation and real wage growth within EMU countries in the last decade is consistent with this conjecture. Calls for additional labour market flexibility, given the magnitude of what is already in store for Europe, may be unwarranted. JEL Numbers: E52, J51 Keywords: Euro, European Integration, European Monetary Union, monetary transmission mechanism * Humboldt University zu Berlin and CEPR. This paper was prepared for the conference on “The Monetary Transmission Process: Recent Developments and Lessons for Europe” organised by the Deutsche Bundesbank, Frankfurt, 25-28 March 1999, and was subsequently revised in July 1999. -
Price Rigidity: Microeconomic Evidence and Macroeconomic
PRICE RIGIDITY: MICROECONOMIC EVIDENCE AND MACROECONOMIC IMPLICATIONS Emi Nakamura Jón Steinsson UC Berkeley March 2019 Nakamura-Steinsson (UC Berkeley) Price Rigidity 1 / 79 Diverse evidence that demand shocks affect output: Monetary shocks: Friedman-Schwartz 63, Eichengreen-Sachs 85, Mussa 86, Christiano-Eichenbaum-Evans 99, Romer-Romer 04, Gertler-Karadi 15, Nakamura-Steinsson 18 Fiscal shocks: Blanchard-Perotti 02, Ramey 11, Barro-Redlick 11, Nakamura-Steinsson 14, Guajardo-Leigh-Pescatori 14 Household deleveraging shocks: Mian-Sufi 14 Major challenge: How to explain this empirical finding? In RBC type models, demand shocks have small effects on output Leading explanation: Prices adjust sluggishly to shocks WHY CARE ABOUT PRICE RIGIDITY IN MACRO? Nakamura-Steinsson (UC Berkeley) Price Rigidity 2 / 79 Major challenge: How to explain this empirical finding? In RBC type models, demand shocks have small effects on output Leading explanation: Prices adjust sluggishly to shocks WHY CARE ABOUT PRICE RIGIDITY IN MACRO? Diverse evidence that demand shocks affect output: Monetary shocks: Friedman-Schwartz 63, Eichengreen-Sachs 85, Mussa 86, Christiano-Eichenbaum-Evans 99, Romer-Romer 04, Gertler-Karadi 15, Nakamura-Steinsson 18 Fiscal shocks: Blanchard-Perotti 02, Ramey 11, Barro-Redlick 11, Nakamura-Steinsson 14, Guajardo-Leigh-Pescatori 14 Household deleveraging shocks: Mian-Sufi 14 Nakamura-Steinsson (UC Berkeley) Price Rigidity 2 / 79 In RBC type models, demand shocks have small effects on output Leading explanation: Prices adjust sluggishly -
A Reconsideration of Full-Cost Pricing
A Reconsideration of Full-Cost Pricing Methodological Aspects of Marginalism and Theoretical Explanations of Pricing Behaviour Inaugural-Dissertation zur Erlangung des Grades Doctor oeconomiae publicae (Dr. oec. publ.) an der Ludwig-Maximilians-Universität München 2010 vorgelegt von Elmar Nubbemeyer Referent: Ekkehart Schlicht Korreferent: Kenneth Coutts Datum der mündlichen Prüfung: 8. November 2010 Promotionsabschlussberatung: 17. November 2010 Acknowledgements This thesis was written in the years 2007-2010 during my time as a research and teaching assistant at the Seminar für Theorie und Politik der Einkom- mensverteilung at the Ludwig-Maximilians-Universität München and my stay at the University of Cambridge, UK. First and foremost, I would like to thank my supervisor Ekkehart Schlicht. His trust, universal support and strong interest in my research ideas were cru- cial for the success of this project. He always took time for my requests, in- spired me with countless suggestions and was a great mentor in matters both academic and not. Furthermore, I thank Ken Coutts, who invited me to a re- search visit at the University of Cambridge, UK and later agreed to act as my secondary supervisor. I am very grateful for his generous hospitality and his interest in my work. I also want to thank Florian Englmaier, who kindly agreed to act as my third examiner. Many friends and co-workers supported me in the course of this work. My dear colleagues and friends Roberto Cruccolini and Christoph Stoeckle helped me in many ways and contributed to a great working atmosphere. Maria Mor- genroth took care of all administrative tasks and often provided good advice. -
Imperfect Competition: Monopoly
Imperfect Competition: Monopoly New Topic: Monopoly Q: What is a monopoly? A monopoly is a firm that faces a downward sloping demand, and has a choice about what price to charge – an increase in price doesn’t send most or all of the customers away to rivals. A Monopolistic Market consists of a single seller facing many buyers. Monopoly Q: What are examples of monopolies? There is one producer of aircraft carriers, but there few pure monopolies in the world - US postal mail faces competition from Fed-ex - Microsoft faces competition from Apple or Linux - Google faces competition from Yahoo and Bing - Facebook faces competition from Twitter, IG, Google+ But many firms have some market power- can increase prices above marginal costs for a long period of time, without driving away consumers. Monopoly’s problem 3 Example: A monopolist faces demand given by p(q) 12 q There are no variable costs and all fixed costs are sunk. How many units should the monopoly produce and what price should it charge? By increasing quantity from 2 units to 5 units, the monopolist reduces the price from $10 to $7. The revenue gained is area III, the revenue lost is area I. The slope of the demand curve determines the optimal quantity and price. Monopoly’s problem 4 The monopoly faces a downward sloping demand curve and chooses both prices and quantity to maximize profits. We let the monopoly choose quantity q and the demand determine the price p(q) because it is more convenient. TR(q) p(q) MR [ p(q)q] q p(q) q q q • The monopoly’s chooses q to maximize profit: max (q) TR(q) TC(q) p(q)q TC(q) q The FONC gives: Marginal revenue 5 TR(q) p(q) The marginal revenue MR(q) p(q) q q q p Key property: The marginal revenue is below the demand curve: MR(q) p(q) Example: demand is p(q) =12-q.