Strategic complementarities as stochastic control under sticky price

TL;DR

This paper models how monetary shocks propagate in an economy with sticky prices and interconnected firm strategies, using a path integral control approach to analyze equilibrium and response dynamics.

Contribution

It introduces a novel application of path integral control to analyze strategic complementarities in a general equilibrium setting with sticky prices.

Findings

Confirmed existence and uniqueness of equilibrium.

Analyzed impulse response functions to monetary shocks.

Provided insights into the dynamics of output responses.

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.