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State-dependent pricing and the non-neutrality of money

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  • Demery, David
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    Abstract

    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 34 (2012)
    Issue (Month): 4 ()
    Pages: 933-944

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    Handle: RePEc:eee:jmacro:v:34:y:2012:i:4:p:933-944

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    Web page: http://www.elsevier.com/locate/inca/622617

    Related research

    Keywords: Menu-cost; Information costs; Non-neutrality of money; State-dependent pricing; Time-dependent pricing; Inattention;

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    References

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    Cited by:
    1. Fernando Alvarez & Francesco Lippi & Luigi Paciello, 2013. "Monetary Shocks with Observation and menu Costs," EIEF Working Papers Series 1310, Einaudi Institute for Economics and Finance (EIEF), revised May 2013.

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