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Equilibrium Price Dispersion and Rigidity: A New Monetarist Approach

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Author Info

  • Allen Head

    ()
    (Department of Economics, Queen's University)

  • Lucy Qian Liu

    ()
    (International Monetary Fund (IMF))

  • Guido Menzio

    ()
    (Department of Economics, University of Pennsylvania)

  • Randall Wright

    ()
    (Department of Economics, University of Wisconsin-Madison)

Abstract

Why do some sellers set prices in nominal terms that do not respond to changes in the aggregate price level? In many models, prices are sticky by assumption. Here it is a result. We use search theory, with two consequences: prices are set in dollars since money is the medium of exchange; and equilibrium implies a nondegenerate price distribution. When money increases, some sellers keep prices constant, earning less per unit but making it up on volume, so profit is unaffected. The model is consistent with the micro data. But, in contrast with other sticky-price models, money is neutral.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 10-034.

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Length: 45 pages
Date of creation: 03 Sep 2010
Date of revision:
Handle: RePEc:pen:papers:10-034

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Related research

Keywords: Search; Sticky Prices; Monetary Policy;

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  1. Boragan Aruoba, S. & Rocheteau, Guillaume & Waller, Christopher, 2007. "Bargaining and the value of money," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2636-2655, November.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Precautionary price stickiness
    by Christian Zimmermann in NEP-DGE blog on 2011-09-08 03:03:46
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Cited by:
  1. Boivin, Jean & Clark, Robert & Vincent, Nicolas, 2012. "Virtual borders," Journal of International Economics, Elsevier, vol. 86(2), pages 327-335.
  2. Liang Wang, 2011. "Inflation and Welfare with Search and Price Dispersion," Working Papers 201113, University of Hawaii at Manoa, Department of Economics.
  3. Rodolfo E. Manuelli & Adrian Peralta-Alva, 2011. ""Frictions in financial and labor markets": a summary of the 35th Annual Economic Policy Conference," Review, Federal Reserve Bank of St. Louis, issue July, pages 273-292.
  4. Becker, Sascha S. & Nautz, Dieter, 2012. "Inflation, price dispersion and market integration through the lens of a monetary search model," European Economic Review, Elsevier, vol. 56(3), pages 624-634.

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