Impact of random monetary shock: a Keynesian case

TL;DR

This paper develops a theoretical model for a firm's optimal pricing strategy under random monetary shocks in a Keynesian setting, showing that increased volatility reduces strategic responses, with empirical evidence from consumer goods firms supporting the model.

Contribution

It introduces a mean field approach to derive an analytic expression for optimal strategies under monetary shocks in a Keynesian framework, extending prior models with empirical validation.

Findings

Greater volatility decreases the firm's optimal strategy.

Observed strategy decline under uncertainty is steeper than model predictions.

Market volatility significantly influences firm pricing strategies.

Abstract

This study investigates the optimal strategy for a firm operating in a dynamic Keynesian market setting. The firm's objective function is optimized using the percent deviations from the symmetric equilibrium of both its own price and the aggregate consumer price index (CPI) as state variables, with the strategy in response to random monetary shocks acting as the control variable. Building on the Calvo framework, we adopt a mean field approach to derive an analytic expression for the firm's optimal strategy. Our theoretical results show that greater volatility leads to a decrease in the optimal strategy. To asses the practical relevance of our model, we apply it to four leading consumer goods firms. Empirical analysis suggests that the observed decline in strategies under uncertainty is significantly steeper than what the model predicts, underscoring the substantial influence of market volatility.