Price Stickiness Heterogeneity and Equilibrium Determinacy

Abstract

AbstractMonetary policy can achieve equilibrium determinacy with considerably weak responses to inflation under price stickiness heterogeneity. The result holds in a sticky‐price model with the constant elasticity‐of‐substitution aggregator and no trend inflation, and with a variable elasticity‐of‐substitution aggregator and historical trend inflation. The evidence in favor of the view that the U.S. economy was subject to self‐fulfilling expectations‐driven fluctuations in the pre‐Volcker period and the systematic shift in monetary policy was crucial in subsequent stabilization of inflation appears much weaker through the lens of price stickiness heterogeneity than previously concluded in the literature under price stickiness homogeneity.