State-dependent pricing and the non-neutrality of money

David Demery

Journal of Macroeconomics, 2012, vol. 34, issue 4, 933-944

Abstract: Golosov and Lucas (2007) have challenged the view that infrequent price adjustments by firms explain why money has aggregate real output effects. The basis of their challenge is the ‘selection effect’ – re-setting firms are not selected at random, they are those firms whose prices are furthest from the optimal reset price. Because of this the aggregate price level is sufficiently flexible for monetary neutrality. In this paper I add price review costs to an otherwise standard Golosov and Lucas model. This weakens the selection effect and restores monetary non-neutrality.

Keywords: Menu-cost; Information costs; Non-neutrality of money; State-dependent pricing; Time-dependent pricing; Inattention (search for similar items in EconPapers)
JEL-codes: E30 E31 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:34:y:2012:i:4:p:933-944

DOI: 10.1016/j.jmacro.2012.05.003

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