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State-dependent pricing and the non-neutrality of money

  • Demery, David
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    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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    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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