Price Inertia in a Macroeconomic Model of Monopolistic Competition

This paper discusses the consequences of price setting by firms under monopolistic competitio n in dynamic models. It is assumed that costs of price adjustment are speed dependent. The Keynesian regime prevails when firms choose a p oint on the demand curve. If real labor costs are relatively high, cu stomers may be rationed. After analyzing firm behavior in a partial e quilibrium setting, demand is made endogenous in a full-scope macroec onomic model. Numerical examples are worked through by applying the t echnique of multiple shooting. It is found that relatively small cost s of price adjustment give rise to substantial macroeconomic effects.