INVESTIGATING NONNEUTRALITY IN A STATE‐DEPENDENT PRICING MODEL WITH FIRM‐LEVEL PRODUCTIVITY SHOCKS

Michael Dotsey and Alexander Wolman

International Economic Review, 2020, vol. 61, issue 1, 159-188

Abstract: In a model with fixed cost of price adjustment and idiosyncratic shocks, two parameterizations match a large set of microeconomic facts, yet display different degrees of nonneutrality. Although there is substantial nonneutrality in both cases, the model does not behave like a time‐dependent model, as changes in the distribution of firms account for roughly a third of the short‐run response of the price level to a monetary shock. We use the model to examine how aggregating firm behavior can generate flat hazards; we also find that a recently developed steady‐state statistic is an imperfect guide to characterizing nonneutrality.

Date: 2020
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https://doi.org/10.1111/iere.12420

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Working Paper: Investigating Nonneutrality in a State-Dependent Pricing Model with Firm-Level Productivity Shocks (2019)
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