Equilibrium Price Dispersion and Rigidity: A New Monetarist Approach

Allen Head (), Lucy Qian Liu (), Guido Menzio and Randall Wright
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Allen Head: Department of Economics, Queen's University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: 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.

Keywords: Search; Sticky Prices; Monetary Policy (search for similar items in EconPapers)
JEL-codes: D43 E51 E52 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2010-09-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:10-034

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