CNB seminar "Rationing Under Sticky Prices"

Prague, 23 July 2025

Tom Holden (Deutsche Bundesbank)

---

Tom Holden is a researcher and macroeconomist in the Deutsche Bundesbank’s research department. He holds PhD from University of Oxford. His research interests lie in theoretical and applied macroeconomics, monetary economics and macroeconomic modelling. He has a number of publications in top journals (Econometrica, The Review of Economics and Statistics, JMCB among others). He has developed a toolbox for solving dynamic models with occasionally binding constraints.

Rationing Under Sticky Prices (abstract)

If prices are sticky, following large shocks, firms would like to ration demand 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 model with idiosyncratic demand shocks and endogenous price rigidity. Allowing rationing massive reduces the welfare costs of positive trend inflation. The loss of variety caused by rationing becomes the main welfare cost of variations in inflation. Rationing helps the model match empirical results from both micro & macro data. It produces a convex, backwards-bending Phillips curve. While expansionary monetary policy increases observed real GDP, it decreases the welfare relevant output aggregator.