The UBS Center Seminar is an academic seminar series that features presentations from renowned international researchers.

Narayana Kocherlakota is the Lionel W. McKenzie Professor of Economics at the University of Rochester, a faculty member at the Simon Business School (at the University of Rochester), and a research associate at the National Bureau of Economic Research (NBER). He received a Ph. D. in economics from The University of Chicago in 1987, under the guidance of Lars Peter Hansen and Jose Scheinkman. Since that time, he held academic appointments at a number of institutions, including Stanford University, Northwestern University, The University of Iowa, and the University of Minnesota. Professor Kocherlakota has been a Fellow of the Econometric Society since 2005. His past research includes theoretical and empirical contributions to many fields in economics, including the economics of money and payments, business cycles, financial economics, public finance, and dynamic games/contracts. His current research is on monetary policy.

Lecture title

Bounds on Price Setting

Abstract

I illustrate that the equilibria of games with strategic complementarities may be of little predictive value if the players have non-compact action sets. Motivated by this observation, I study a class of macroeconomic models in which all firms can costlessly choose any price at each date from a compact interval (indexed to last period’s price level). I prove three results that are valid for any such compact interval. First, given any allocation, there is a (possibly time-dependent) specification of monetary and fiscal policy that implies that allocation is part of an equilibrium. Second, given any specification of monetary and fiscal policy in which the former is time invariant and the latter is Ricardian (in the sense of Woodford (1995)), there is a sequence of equilibria in which consumption converges to zero on a date-by-date basis. These first two results suggest that standard macroeconomic models without pricing bounds (be they sticky or flex price) provide a false degree of confidence in long-run macroeconomic stability and undue faith in the long-run irrelevance of monetary policy. The paper’s final result constructs a non-Ricardian nominal framework (in which the long-run growth rate of nominal government liabilities is suffciently high) that pins down a unique stable real outcome as an equilibrium.

Paper

Bounds on Price Setting by Narayana R. Kocherlakota of University of Rochester and NBER (December 2018) - download