« Fiscal policy after the recession | Main | An alternative universe with gold price control »


Feed You can follow this conversation by subscribing to the comment feed for this post.

Adam P: I agree with all your points about calvo pricing. But I want both a forward and a backward-looking term in the PC. And you can get that backward-looking term in (introduce inflation inertia) if you drop the Calvo assumption that the firms changing prices today are a random and hence representative sample of all firms. Rather, the sample of firms changing prices today will be biased towards the firms with the oldest prices. But that biased sample makes the maths hard.

Agreed that we need a backward-looking term as well. I was thinking that it's the firms whose current prices are the farthest from optimal, many of these would be firms with the oldest prices but some would be firms who mis-judged future inflation or demand for their goods in the past.

I still have a lot of sympathy for the old Lucas story about noisy signals...

A little late to the party I guess ...

Seems to me that inflation expectation being positive and well anchored is a big part of what makes prices sticky. I suppose that's probably obvious.

But if an asset bubble inflates and pops suddenly then inflation expectation would become unhinged or even negative (at least for the asset class in which there was a bubble) and prices would become fluid. That is, everyone suddenly realizes that there was a bubble, and prices are too high and must adjust down. If the bubble was really big, and the pop violent, there might even be a discontinuous gap down in prices.

If housing and the effect of interest rates on housing is an important part of how monetary policy is transmitted to the real economy, then wouldn't it be enough for inflation expectation as it relates to housing to become unhinged/negative/indeterminate to pretty well sabotage interest rates as a control mechanism for the economy? And wouldn't the popping of the housing bubble create first indeterminate expectation (at the very top), then deflationary expectation (on the way down), then indeterminate expectation (at the bottom), and finally positive expectation (on the way back up)?

Much better late than never! Busy? It's good to see you at the party.

I don't think it's obvious that well anchored expectations make prices more sticky. Depends on your model of price adjustment, and if by more "sticky" you mean move less in some absolute sense, or mean move less relative to the equilibrium price.

I hadn't been thinking about real asset prices, like houses, or stocks. I should have been. I think they are an important part of the transmission mechanism. Tobin's Q, if you like.

Your conjectures sound about right, I think.

"Much better late than never! Busy? It's good to see you at the party."

I have to read these "wonkish" posts several times very carefully and go look up the stuff I don't understand before I say anything. Sometimes that takes a while.

I admit that I have to think about the price stickiness and expectation thing some more. I have an intuitive sense that expectation and stickiness should be related, but maybe I'm not understanding something ...

"I have to read these "wonkish" posts several times very carefully and go look up the stuff I don't understand before I say anything. Sometimes that takes a while."

I should probably do the same, before posting them ;-)

Define p* as the frictionless equilibrium price, i.e. the price firms would set if they adjusted price continuously and had no menu costs etc.

If expectations fluctuate more (for some exogenous reason, demand and/or supply will fluctuate more, and so p* will fluctuate more.

So when firms did change their prices, they would tend to change them by a bigger amount, since they would tend to be further away from p*.

And, they would also tend to change their prices more frequently.

That's what my intuition tells me.

The comments to this entry are closed.

Search this site

  • Google

Blog powered by Typepad