Dynamic Stability of Post-Keynesian Pricing

The B.E. Journal of Theoretical Economics 17(2), online 24 February 2017

Author(s): Kemp-Benedict, E.
Year: 2017

Research Area(s): Sustainable Futures


Conventional economic theory assumes a Walrasian pricing mechanism that is known to pose theoretical difficulties. Less well-known is that conventional price theory conflicts with empirical studies of price-setting in industrial firms. Post-Keynesian theory, which assumes mark-up pricing on normal costs and infrequent price changes, is consistent with observation.

This paper shows that post-Keynesian pricing, unlike conventional pricing, features stable dynamics. The analysis focus on the short run, because post-Keynesian theory posits complex and historically contingent long-term price dynamics. Specifically, the paper shows that under very general conditions, prices converge to a unique equilibrium price vector.

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