Premium
STATE DEPENDENT PRICING AND BUSINESS CYCLE ASYMMETRIES *
Author(s) -
Devereux Michael B.,
Siu Henry E.
Publication year - 2007
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2007.00426.x
Subject(s) - business cycle , economics , linkage (software) , state dependent , incentive , econometrics , asymmetry , monetary economics , monetary policy , empirical evidence , microeconomics , macroeconomics , keynesian economics , biochemistry , chemistry , physics , philosophy , epistemology , quantum mechanics , gene
We present a tractable, dynamic general equilibrium model of state‐dependent pricing and study the response of output and prices to monetary policy shocks. We find important nonlinearities in these responses. For empirically relevant shocks, this generates substantially different predictions from time‐dependent pricing. We also find a distinct asymmetry with state‐dependent pricing: Prices respond more to positive shocks than they do to negative shocks. This is due to a strategic linkage between firms in the incentive for price adjustment. Our state‐dependent model can account for business cycle asymmetries in output of the magnitude found in empirical studies.