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Price Setting with Strategic Complementarities as a Mean Field Game

Microeconomics Seminar

Add to calendar 2023-02-08 11:00 2023-02-08 12:15 Europe/Rome Price Setting with Strategic Complementarities as a Mean Field Game Seminar Room 3rd Floor Villa La Fonte YYYY-MM-DD


08 February 2023

11:00 - 12:15 CET


Seminar Room 3rd Floor

Villa La Fonte

In this seminar, Francesco Lippi (Luiss University), will present the paper: "Price setting with strategic complementarities as a mean field game".

We study the propagation of monetary shocks in a sticky-price general-equilibrium economy where the firms’ pricing strategy feature a complementarity with the decisions of other firms. In a dynamic equilibrium the firm’s price-setting decisions depend on aggregates, which in turn depend on firms’ decisions. We cast this fixed-point problem as a Mean Field Game and establish several analytic results. We study existence and uniqueness of the equilibrium and characterize the impulse response function (IRF) of output following an aggregate "MIT" shock. We prove that strategic complementarities make the IRF larger at each horizon, in a convex fashion. We establish that complementarities may give rise to an IRF with a hump-shaped profile. As the complementarity becomes large enough the IRF diverges and at a critical point there is no equilibrium. Finally, we show that the amplification effect of the strategic interactions is similar across models. For instance, the Calvo model and the Golosov-Lucas model display a comparable amplification, in spite of the fact that the non-neutrality in Calvo is much larger.

Co-authors: Fernando Alvarez (University of Chicago and NBER) and Panagiotis Souganidis (University of Chicago)

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