Sticky prices: a new monetarist approach

Allen Head (), Lucy Qian Liu (), Guido Menzio and Randall Wright

No 690, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: 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.

Date: 2011
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: STICKY PRICES: A NEW MONETARIST APPROACH (2012)
Working Paper: Sticky Prices: A New Monetarist Approach (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:690

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