Essays on state dependent pricing models

by Ho, Wai-yip

Abstract (Summary)
(Uncorrected OCR) Abstract of thesis entitled Essays on State Dependent Pricing Models submitted by Wai-Yip Alex HO for the degree of Master of Philosophy in Economics at The University of Hong Kong in August 2004 Abstract A dynamic general equilibrium model is developed to study the properties of state dependent pricing. In the first section, we analyze the long-run properties of the model and find that the effect of strategic complementarity in pricing decision between firms plays an important role in the model. When trend inflation rate exceeds some critical level, such strategic complementarity results in existence of multiple equilibria in the model (2 equilibria). As trend inflation increases, the difference between the two equilibria gets wider. We then investigate the number of possible equilibrium by looking at the best response function of firms over certain values of trend inflation rate. We find that there exist one more unstable equilibrium. We finally access the long run difference between the state dependent pricing model and the Calvo-pricing model and find that the effect of trend inflation on the model with state dependent pricing is much smaller than with Calvo-pricing. Under the same model specification and over the range of 1% to 6% trend inflation rate, we find that the effect of an increase in trend inflation with state dependent pricing is smaller than with Calvo-pricing. In the next section, we explore the properties of the impulse responses of the state-dependent pricing model and compare it with a time-dependent pricing model. State-dependent pricing models show asymmetries in responding to different signs of a temporary money supply growth rate shock. However, real effects of such monetary shocks are not increasing proportionally to the size of the shock. Interestingly, we find that if the size of the shock exceeds some critical level, the impulse response of the model to a positive shock converges to the impulse response to a negative shock.
Bibliographical Information:


School:The University of Hong Kong

School Location:China - Hong Kong SAR

Source Type:Master's Thesis

Keywords:pricing mathematical models


Date of Publication:01/01/2005

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