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The real effects of inflation in continuous versus discrete time sticky price models
Author(s) -
Alex Ho WaiYip,
Yetman James
Publication year - 2007
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1327
Subject(s) - economics , inflation (cosmology) , flexibility (engineering) , discrete time and continuous time , econometrics , price level , mathematical economics , monetary economics , microeconomics , mathematics , statistics , physics , theoretical physics , management
We demonstrate the important implications of the assumptions of discrete time in many sticky price models of the macroeconomy. For a given level of menu costs, discrete time models imply longer average contract length but smaller real effects of both trend inflation and monetary shocks than continuous time models. It is also feasible for a firm to enjoy full price flexibility in discrete time, while this would require paying infinite menu costs in continuous time, a distinction that is most important at high levels of trend inflation. Copyright © 2007 John Wiley & Sons, Ltd.