State-dependent pricing and the non-neutrality of money

► Price review costs are added to a standard menu cost model. ► Reis’s inattentiveness model and the Golosov–Lucas model are shown to be special cases. ► Time- and state-dependency play key roles in the review-cost model. ► The selection effect is sufficiently weakened to restore the non-neutrality...

Full description

Saved in:
Bibliographic Details
Published in:Journal of macroeconomics 2012-12, Vol.34 (4), p.933-944
Main Author: Demery, David
Format: Article
Language:English
Subjects:
Economic models
Inattention
Information costs
Macroeconomics
Menu-cost
Monetary models
Money
Neutrality
Non-neutrality of money
Output potential
Price level
Price levels
Pricing policies
State-dependent pricing
Studies
Time-dependent pricing
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:► Price review costs are added to a standard menu cost model. ► Reis’s inattentiveness model and the Golosov–Lucas model are shown to be special cases. ► Time- and state-dependency play key roles in the review-cost model. ► The selection effect is sufficiently weakened to restore the non-neutrality of money. Golosov and Lucas (2007) have challenged the view that infrequent price adjustments by firms explain why money has aggregate real output effects. The basis of their challenge is the ‘selection effect’ – re-setting firms are not selected at random, they are those firms whose prices are furthest from the optimal reset price. Because of this the aggregate price level is sufficiently flexible for monetary neutrality. In this paper I add price review costs to an otherwise standard Golosov and Lucas model. This weakens the selection effect and restores monetary non-neutrality.
ISSN:0164-0704
1873-152X
DOI:10.1016/j.jmacro.2012.05.003