Lecture 5 - Isabelle MEJEAN's home page
Lecture 5 - Isabelle MEJEAN's home page
Lecture 5 - Isabelle MEJEAN's home page
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Betts & Devereux (1996)<br />
Campa & Goldberg (2006)<br />
Aggregate prices<br />
PPP holds under flexible prices<br />
P =<br />
P ∗ =<br />
" <br />
σ W 1−σ <br />
σ W ∗ 1−σ <br />
n<br />
+ (1 − n)s e<br />
(1 − n)(1 − s) e<br />
σ − 1 A<br />
σ − 1 A ∗<br />
" <br />
σ W 1−σ 1 σ W<br />
ns<br />
+ n(1 − s)<br />
σ − 1 Ae<br />
e σ − 1 A<br />
1−σ <br />
(1 − n)<br />
σ<br />
σ − 1<br />
σ<br />
σ − 1<br />
W ∗<br />
A ∗ 1−σ<br />
W ∗ # 1<br />
1−σ 1−σ<br />
A ∗<br />
⇒ P = eP ∗<br />
PPP does not hold under sticky prices when some firms price in LCP:<br />
⇒<br />
ˆP = (1 − n)(1 − s)ê<br />
ˆP ∗ = −n(1 − s)ê<br />
ˆP − ˆP ∗ = (1 − s)ê ≠ ê<br />
<strong>Isabelle</strong> Méjean <strong>Lecture</strong> 5
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