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.