DP5535 Sticky Prices and Indeterminacy
| Author(s): | Mark Weder |
| Publication Date: | March 2006 |
| Keyword(s): | Calvo-pricing, cash-in-advance economies, sunspot equilibria |
| JEL(s): | E31, E32 |
| Programme Areas: | International Macroeconomics |
| Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=5535 |
The aim of the present paper is to analyze the link between price rigidity and indeterminacy. This is done within a cash-in-advance economy from which we know that it exhibits indeterminacy at high degrees of relative risk aversion. I find that price stickiness reduces the scope of these sunspot equilibria: sluggish price adjustment requires degrees of relative risk aversion compatible with indeterminacy that prove too high to square with data.