The price system, the adjustment of prices to changes in market conditions, is the primary mechanism by which markets function and by which the three most basic questions get answered: what to produce, how much to produce and for whom to produce. To the behaviour of price and price system, therefore, have fundamental implications for many key issues in microeconomics and industrial organization...

In an influential paper, Aoki (2001) used a closed-economy setup with two sectors – with flexible and sticky prices, respectively – to conclude that it is optimal for inflationtargeting central banks to react only to the inflation rate of the sector with the highest degree of price rigidity. Aoki’s paper also implies that targeting aggregate “average” indices such as the Consumer Price Index (C...

We estimate small open economy models with involuntary unemployment using Australian data from 1993 to 2007, focusing on hiring costs and real wage rigidity. We find a strong preference for models with hiring costs, which account for 0.97% of GDP. The data favour models with real over nominal wage rigidity. Impulse responses to technology shocks reveal no productivityemployment puzzle for the p...

In the 1970s, 1980s, and early 1990s, models used for monetary policy analysis combined the assumption of nominal rigidity with a simple structure that linked the quantity of money to aggregate spending. While the theoretical foundations of these models were weak, the approach proved remarkably useful in addressing a wide range of monetary policy topics.1 Today, the standard approach in monetar...

In this paper I study the relation between real wage rigidity (RWR) and nominal price and wage rigidities. I show that in a standard DSGE model RWR is mainly affected by the two nominal rigidities and not by the other structural parameters. The degree of RWR is, however, considerably influenced by the modelling assumption (e.g. Calvo vs. Taylor wage contracts and the clustering of contracts). I...