A dynamic economy with costly price adjustments

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67 Scopus citations


This paper studies a general-equilibrium model of a dynamic economy with menu costs. Each firm's productivity is exposed to idiosyncratic and aggregate productivity shocks around a trend, and the money supply to monetary shocks around a trend. All consumption, pricing, and production decisions are based on optimizing behavior. There exists a staggered Markov perfect equilibrium with prices determined by a two-sided (s, S) markup strategy. The paper analyzes the optimal markup strategy and investigates the dynamics of the price index and the aggregate output. The welfare consequences of the uncertain aggregate productivity and money supply are also examined.

Original languageEnglish
Pages (from-to)878-901
Number of pages24
JournalAmerican Economic Review
Issue number4
StatePublished - 1 Jan 1999
Externally publishedYes

ASJC Scopus subject areas

  • Economics and Econometrics


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