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Two New Keynesian Theories Of Sticky Prices

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  • Farmer, Roger E.A.
Abstract
Two alternative theories of aggregate supply, both with a New Keynesian “flavor,” are compared. The first assumes that prices are rigid due to the existence of menu costs. The second derives price stickiness endogenously as one equilibrium in an economy with multiple equilibria. In both cases I show that the Ball–Romer concept of real rigidities is essential to explain why monetary policy has real persistent effects. I argue that dynamic menu cost models are determinate because they make special assumptions about the way that money enters the economy. For example, most authors assume either a cash-in-advance constraint or that money enters separably into utility or production functions. Once one moves beyond these special cases, menu cost models that display real rigidity are also likely to display indeterminacy.

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  • Farmer, Roger E.A., 2000. "Two New Keynesian Theories Of Sticky Prices," Macroeconomic Dynamics, Cambridge University Press, vol. 4(1), pages 74-107, March.
    • Handle: RePEc:cup:macdyn:v:4:y:2000:i:01:p:74-107_01
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    Cited by:

    1. Kirill Sosunov, 2001. "Monetary neutrality in one specific class of DGE model with staggered prices," Macroeconomics 0112003, University Library of Munich, Germany.
    2. Haruvy, Ernan & Prasad, Ashutosh, 2005. "Freeware as a competitive deterrent," Information Economics and Policy, Elsevier, vol. 17(4), pages 513-534, October.
    3. Roger E.A. Farmer & Giovanni Nicolò, 2021. "Some International Evidence for Keynesian Economics Without the Phillips Curve," Manchester School, University of Manchester, vol. 89(S1), pages 1-22, September.
    4. Jess Benhabib & Roger E.A. Farmer, 2000. "The Monetary Transmission Mechanism," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 523-550, July.
    5. Giammarioli, Nicola, 2003. "Indeterminacy and search theory," Working Paper Series 271, European Central Bank.
    6. Farmer, Roger E.A. & Platonov, Konstantin, 2019. "Animal spirits in a monetary model," European Economic Review, Elsevier, vol. 115(C), pages 60-77.
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    8. Katharine S. Neiss & Evi Pappa, 2005. "Persistence without too much price stickiness: the role of variable factor utilization," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 231-255, January.
    9. John W. Keating & Isaac K. Kanyama, 2015. "Is sticky price adjustment important for output fluctuations?," Review of Keynesian Economics, Edward Elgar Publishing, vol. 3(3), pages 392-418, July.
    10. Giovanni Lombardo, "undated". "Sticky Prices, Markup and the Business Cycle: Some Evidence," Discussion Papers 01/06, Department of Economics, University of York.
    11. Roger E.A. Farmer, 2013. "Animal Spirits, Financial Crises and Persistent Unemployment-super-," Economic Journal, Royal Economic Society, vol. 0, pages 317-340, May.
    12. Canova, Fabio & Nicolo, Gianni De, 2002. "Monetary disturbances matter for business fluctuations in the G-7," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1131-1159, September.
    13. Sveen, Tommy & Weinke, Lutz, 2007. "Firm-specific capital, nominal rigidities, and the Taylor principle," Journal of Economic Theory, Elsevier, vol. 136(1), pages 729-737, September.

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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