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Asymmetric Price Adjustment:Micro-foundations and Macroeconomic Implications

Bhaskar, V (2002) Asymmetric Price Adjustment:Micro-foundations and Macroeconomic Implications. Working Paper. University of Essex, Department of Economics, Economics Discussion Papers, Colchester.


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We present a simple menu cost model which explains the finding that firms are more likely to adjust prices upward than downward. Asymmetric adjustment to shocks arises naturally, even without trend inflation, from the desire of firms to keep industry prices as high as is sustainable and the non-convexity due to menu costs. It implies that aggregate demand shocks have asymmetric effects- negative shocks are reduce output, whereas positive shocks are inflationary. We examine the implications of asymmetric adjustment for equilibrium output and the optimal inflation rate.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: nominal inertia, inflation, monetary policy.
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Users 161 not found.
Date Deposited: 28 Aug 2014 14:55
Last Modified: 28 Aug 2014 14:55

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