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State-Dependent Pricing and the Non-Neutrality of Money

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  • David Demery

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    Abstract

    Golosov and Lucas (2007) have challenged the view that infrequent price adjustments by firms explains 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 equilibrium. 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 to a level comparable to that of the Calvo (1983) pricing model.

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    File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp10615.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 10/615.

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    Length: 30 pages
    Date of creation: Sep 2010
    Date of revision:
    Handle: RePEc:bri:uobdis:10/615

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    Related research

    Keywords: menu-cost; information costs; non-neutrality of money; state-dependent pricing; time-dependent pricing.;

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    1. S. Fabiani & M. Druant & I. Hernando & C. Kwapil & B. Landau & C. Loupias & Fernando Martins & T. Mathä & R. Sabbatini & H. Stahl & A. Stokman, 2005. "The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence," Working Papers, Banco de Portugal, Economics and Research Department w200510, Banco de Portugal, Economics and Research Department.
    2. Silvia Fabiani & Martine Druant & Ignacio Hernando & Claudia Kwapil & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Mathä & Roberto Sabbatini & Harald Stahl & Ad Stokman, 2006. "What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    3. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2011. "Optimal Price Setting With Observation and Menu Costs," The Quarterly Journal of Economics, Oxford University Press, Oxford University Press, vol. 126(4), pages 1909-1960.
    4. Huw Dixon & Engin Kara, 2010. "Can We Explain Inflation Persistence in a Way that Is Consistent with the Microevidence on Nominal Rigidity?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 42(1), pages 151-170, 02.
    5. Virgiliu Midrigan, 2005. "Is Firm Pricing State or Time-Dependent? Evidence from US Manufacturing," Macroeconomics, EconWPA 0511005, EconWPA.
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