MACRO: Rationing Under Sticky Prices; Dr Tom Holden (Deutsche Bundesbank)

Abstract

Following the Covid pandemic, the Ever-Given blockage and the Ukrainian war, many goods experienced stockouts and delivery delays. But if prices are flexible, then production cost increases pass through to prices, and all goods remain available. Only if prices are sticky might firms ration demand through stockouts or delivery delays, to avoid selling goods at a price below marginal cost. However, the standard assumption in solving sticky price models is that firms sell the entire quantity demanded at their price. This paper investigates the consequences of allowing firms to ration under sticky prices, in a continuous time New Keynesian model with idiosyncratic demand shocks. Rationing helps the model match empirical results from both micro & macro data. It produces a convex, backward bending Phillips curve, yet lower monetary non-neutrality and significantly higher optimal inflation.