Abstract
We revisit Ball and Romer’s (1990) canonical model of price setting with menu costs that exhibits multiple equilibria. We show that changes to firms’ markups move nominal and real rigidities in opposite directions. Using game-theoretic tools to derive a unique equilibrium, we find that accounting for agents’ endogenous adjustment of price expectations further weakens the link between real and nominal rigidities.
Type
Publication
Economics Letters
Alexander Meyer-Gohde
Professor of Financial Markets and Macroeconomics
My research interests include macroeconomics, macro-finance, econometrics, and numerical methods