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A Diamond-Townsend Model of Business Cycles
We introduce price posting and search frictions into Townsend’s (1980) monetary macro model. Despite costless price adjustment, insufficient search incentives prevent Walrasian outcomes. The set of possible stationary equilibria comprises a finite interval of constant-inflation price paths. We assume that inflation expectations are rational and that they are stationary whenever possible. In this model, transitory small shocks temporarily affect quantities but not prices. However, large shocks—or accumulations of smaller shocks—can move the entire interval of equilibrium price paths beyond the previous path, forcing price adjustment. Even if shocks are temporary, such price movements create persistent changes in output.
Date:
26 November 2024, 13:15
Venue:
Manor Road Building, Manor Road OX1 3UQ
Venue Details:
Seminar Room A
Speaker:
Davide Domeij (Stockholm School of Economics)
Organising department:
Department of Economics
Part of:
Macroeconomics Seminar
Booking required?:
Not required
Audience:
Members of the University only
Editor:
Edward Valenzano
