Aggregation and optimization with state-dependent pricing

Andrew Caplin, John Leahy

    Research output: Contribution to journalArticlepeer-review

    Abstract

    The literature on the aggregation of (S, s) policies has ignored the impact of aggregate behavior on the individual's optimization problem. In the case of pricing, the feedback effects are clear. Not only do pricing strategies determine the evolution of the price level, but the evolution of the price level also influences the optimal pricing strategies. In this paper, we provide a consistent treatment of aggregation and optimization. We use this model to analyze three issues in the menu cost pricing literature: the relationship between strategic complementarity and the real effects of money; the relationship between the variance of the money supply and the correlation between money and output; and the relationship between the cost of price adjustment and the size of price adjustment.

    Original languageEnglish (US)
    Pages (from-to)601-625
    Number of pages25
    JournalEconometrica
    Volume65
    Issue number3
    DOIs
    StatePublished - May 1997

    Keywords

    • Aggregation
    • Menu cost
    • Money-output correlation
    • State-dependent pricing
    • Strategic complementarity

    ASJC Scopus subject areas

    • Economics and Econometrics

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