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7/2008

DEPFID Working Paper 7/2008 - Abstract

 

Ambiguous Money Distribution And The Price Stickiness Phenomenon:
A Rationale From An Ambiguous Rational Expectations Approach

Marcello Basili and Stefano Dalle Mura
 

This paper shows that ambiguity – as opposed to risk – may lead to sticky prices even with fully rational agents. Attitude towards ambiguity is assumed, as supported by theoretical literature and experimental evidence, to be asymmetric in the form of ambiguity aversion towards uncertain gains and ambiguity seeking towards losses. In this setting that price stickiness follows a change in the money supply level that does not alter the distribution of money constitutes a self fulfilling expectations equilibrium. That is the average (expected) result, but other interesting cases can occur (price overshooting and an inverse relationship between prices economic activity). Money neutrality remains true in the long run. The main result is carried out in a model where ambiguity concerns firms’ ignorance about the relationship between the stock of money and money distribution.

Keywords: ambiguity, multiple priors, price stickiness

JEL Classification: D81; E52; O42

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