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Equilibrium Price Dispersion and Rigidity: A New Monetarist Approach

  • 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)

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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File URL: http://economics.sas.upenn.edu/system/files/working-papers/10-034.pdf
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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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  1. Guillaume Rocheteau & Christopher Waller, 2005. "Bargaining and the value of money," Working Paper 0501, Federal Reserve Bank of Cleveland.
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