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Sticky Prices and Indeterminacy

Authors


  • I wish to thank Raul Barreto, Michael Burda, Larry Christiano, David Levine, Thomas Lubik, Ludo Renou, Adelaide brown bag eaters, seminar participants at SWIM 2006, at WMD 2006, the Reserve Bank of Australia, EUI, and an anonymous referee for very useful comments.

Abstract

The aim of this paper is to analyze the link between price rigidity and indeterminacy. This is done within a cash-in-advance economy that is known to exhibit indeterminacy at high degrees of relative risk aversion. My findings show that price stickiness reduces the scope of these sunspot equilibria: to be compatible with indeterminacy, sluggish price adjustment requires degrees of relative risk aversion that prove too high to square with data.

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