Abstract:

We describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero, where the times spent in each state are of random duration. This class of processes includes Two-State Markov Chains and Renewal Processes as special cases. It is shown that the optimal pricing policy of a monopolistic firm with non-convex costs of price adjustment is ( S, s ) in its real-price, i.e. its nominal price relative to the price level. A basic certainty-equivalence result is proved: i.e. the firm behaves as if it faces a certain and [...]

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