calvo - STAGGERED PRICES IN A UTILITY-MAXIMIZING FRAMEWORK...

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STAGGERED PRICES IN A UTILITY-MAXIMIZING FRAMEWORK Guillermo A. Calvo (1983) 1 Introduction There are two basic assumptions of the paper: 1. Nominal individual prices are not subject to continuous revisions. 2. Price revisions are non-synchronous. In order to capture this phenomenon, for the sake of the model, the following assumptions are made in the model: lit up. The probability that the signal will be emitted in the next h periods follows a geometric 1
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2 A Model of Staggered Prices the [0 ; 1] interval, thus their total is equal to unity. y units at zero variable cost. Output is assumed to be non-storable. The probability of receiving a price-change signal h periods from today is given by ; & > 0 prices constant unless it gets a signal. The expected length of a price quotation is (1 ) : price and the state of the market (given by excess demand here) during the relevant 2
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future: V t = Z 1 t [ P s + ±E s ] e ( s t ) ds; ± > 0 where V t is the log of the price quotation set at t , P s is the price level at time s , or more s . In particular, V t depends on the sum of current and future price levels together with the current and future levels of excess demand. Note that [ P s + ±E s ] is weighted by the probability (density) that the price quotation could be revised at time s , i.e., ( s t ) . The price level at t is given by the following expression: P t = Z 1 t V s e ( t s ) ds Since V t = R 1 t [ P s + ±E s ] e ( s t ) ds , P t is predetermined at time t : its level is given by past price quotations ( past values of V ) . On the other hand, V
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This note was uploaded on 01/11/2012 for the course ECO 601 taught by Professor Hakanyilmazkuday during the Fall '11 term at FIU.

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calvo - STAGGERED PRICES IN A UTILITY-MAXIMIZING FRAMEWORK...

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