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This paper considers an optimal pricing model in continuous time that combines state and time dependent elements usually examined separately in the literature. In this model we find that recessions and booms are of roughly equal amplitude, contrary to results in Ball and Mankiw (1994) and Conlon and Liu (1997). On the other hand, while the amplitudes of booms and recessions are similar, their lengths differ. Applying the intuition developed in Ball and Mankiw to our model indicates that firms raise prices less frequently during recessions but more frequently during booms, so price-setters respond to booms more quickly.
Published Online: 2010-4-19
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
