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Sticky Prices: A New Monetarist Approach

  • Allen Head
  • Lucy Qian Liu
  • Guido Menzio
  • Randall Wright

Why do some sellers set nominal prices that apparently 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 the money supply increases, some sellers may keep prices constant, earning less per unit but making it up on volume, so profit stays constant. The calibrated model matches price-change data well. But, in contrast with other sticky-price models, money is neutral.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17520.

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Date of creation: Oct 2011
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Publication status: published as Allen Head & Lucy Qian Liu & Guido Menzio & Randall Wright, 2012. "Sticky Prices: A New Monetarist Approach," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 939-973, October.
Handle: RePEc:nbr:nberwo:17520
Note: EFG
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  1. Huberto M. Ennis, 2005. "Search, Money, and Inflation under Private Information," 2005 Meeting Papers 135, Society for Economic Dynamics.
  2. Allen Head & Alok Kumar & Beverly Lapham, 2006. "Market Power, Price Adjustment, and Inflation," Working Papers 1089, Queen's University, Department of Economics.
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  7. Jeffrey R. Campbell & Benjamin Eden, 2014. "Rigid Prices: Evidence From U.S. Scanner Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 423-442, 05.
  8. Mei Dong & Janet Hua Jiang, 2011. "Money and Price Posting under Private Information," Working Papers 11-22, Bank of Canada.
  9. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
  10. Nosal, Ed & Rocheteau, Guillaume, 2011. "Money, Payments, and Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262016281, June.
  11. Etienne Gagnon, 2009. "Price Setting During Low and High Inflation: Evidence from Mexico," The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 1221-1263, August.
  12. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284 Elsevier.
  13. Allen Head & Alok Kumar, 2004. "Price Dispersion, Inflation and Welfare," NajEcon Working Paper Reviews 122247000000000241, www.najecon.org.
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