State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output

Michael Dotsey, Robert G. King and Alexander Wolman

The Quarterly Journal of Economics, 1999, vol. 114, issue 2, 655-690

Abstract: Economists have long suggested that nominal product prices are changed infrequently because of fixed costs. In such a setting, optimal price adjustment should depend on the state of the economy. Yet, while widely discussed, statedependent pricing has proved difficult to incorporate into macroeconomic models. This paper develops a new, tractable theoretical state-dependent pricing framework. We use it to study how optimal pricing depends on the persistence of monetary shocks, the elasticities of labor supply and goods demand, and the interest sensitivity of money demand.

Date: 1999
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