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uhvwulfwlrq rq uhodwlyh sulfhv +616, wr fdofxodwh wkh uhodwlyh sulfh ri wkh c{0sulfh* up zklfk fdqqrw dgmxvw sulfhv1 Wklv sulfh kdv wr ghfolqh zlwk pdujlqdo frvw/ vlqfh erwk R dqg Rf duh lqfuhdvlqj zlwk pdujlqdo W frvw1 Ilqdoo|/ zh fdofxodwh doorfdwlrqdo h!flhqf| @ xvlqj htxdwlrq +617, dqg rxu uhvxowv iru Rf dqg R 1 Qrwh wkdw dw wkh vwhdg| vwdwh wkhuh lv d wudgh0r ehwzhhq wkh uhodwlyh sulfh glvwruwlrq dqg wkh pdun0xs glvwruwlrq/ wkdw lv wkh frqvwudlqw judsk lv qhjdwlyho| vorshg1 Iru yhu| orz ydoxhv ri wkh pdujlqdo frvw/ wkdw lv yhu| kljk pdun0xsv/ wkh frqvwudlqw fxuyh lv srvlwlyho| 44 vorshg/ dqg d ixuwkhu uhgxfwlrq ri wkh pdun0xs dovr ohdgv wr pruh doorfdwlrqdo h!flhqf|1 Wkh vwhdg| vwdwh lq dwlrq udwh lv uhsuhvhqwhg e| wkh udwlr Rf *R / dqg jlyhq wkh pryhphqwv ri wkh wzr sulfhv zh vhh wkdw wkh kljkhu pdujlqdo frvw +orzhu pdun0xs, lv dvvrfldwhg zlwk kljkhu lq dwlrq1 Optimal Price of Fix-Price Firm Price Index Equation 1.025 1.015 α=0 1.01 1 1.02 α = 0.2 Lagged Relative Price p 0 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