Strategic complementarities as stochastic control under sticky price

Lambert Dong

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arXiv · 2403.19847

Strategic complementarities as stochastic control under sticky price

Lambert Dong

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Abstract

We examine how monetary shocks spread throughout an economic model characterized by sticky prices and general equilibrium, where the pricing strategies of firms are interlinked, fostering a mutually beneficial relationship. In this dynamic equilibrium, pricing choices of firms are influenced by overall economic factors, which are themselves affected by these decisions. We approach this situation using a path integral control method, yielding several important insights. We confirm the presence and uniqueness of the equilibrium and scrutinize the impulse response function (IRF) of output subsequent to a shock affecting the entire economy.

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Lambert Dong. 2024-03-28. Strategic complementarities as stochastic control under sticky price. https://arxiv.org/abs/2403.19847

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