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State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output

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  • Michael Dotsey
  • Robert G. King
  • Alexander L. Wolman

Abstract

Economists have long suggested that nominal product prices are changed infrequently because of fixed costs. In such a setting, optimal price adjustment should depend on the state of the economy. Yet, while widely discussed, statedependent pricing has proved difficult to incorporate into macroeconomic models. This paper develops a new, tractable theoretical state-dependent pricing framework. We use it to study how optimal pricing depends on the persistence of monetary shocks, the elasticities of labor supply and goods demand, and the interest sensitivity of money demand.

Suggested Citation

  • Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 655-690.
    • Handle: RePEc:oup:qjecon:v:114:y:1999:i:2:p:655-690.
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