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The real effects of inflation in continuous versus discrete time sticky price models

✍ Scribed by Wai-Yip Alex Ho; James Yetman

Publisher: John Wiley and Sons
Year: 2007
Tongue: English
Weight: 293 KB
Volume: 28
Category: Article
ISSN: 0143-6570
DOI: 10.1002/mde.1327

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✦ Synopsis

Abstract

We demonstrate the important implications of the assumptions of discrete time in many sticky price models of the macroeconomy. For a given level of menu costs, discrete time models imply longer average contract length but smaller real effects of both trend inflation and monetary shocks than continuous time models. It is also feasible for a firm to enjoy full price flexibility in discrete time, while this would require paying infinite menu costs in continuous time, a distinction that is most important at high levels of trend inflation. Copyright © 2007 John Wiley & Sons, Ltd.

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