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State-dependent pricing and the non-neutrality of money

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  • Demery, David

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.

Suggested Citation

  • Demery, David, 2012. "State-dependent pricing and the non-neutrality of money," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 933-944.
  • Handle: RePEc:eee:jmacro:v:34:y:2012:i:4:p:933-944
    DOI: 10.1016/j.jmacro.2012.05.003
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    References listed on IDEAS

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    Cited by:

    1. francesco lippi & Luigi Paciello & Fernando Alvarez, 2012. "Monetary Shocks with Observation and Menu Costs," 2012 Meeting Papers 439, Society for Economic Dynamics.

    More about this item

    Keywords

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

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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