DP5535 Sticky Prices and Indeterminacy
|Publication Date:||March 2006|
|Keyword(s):||Calvo-pricing, cash-in-advance economies, sunspot equilibria|
|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.