State-Dependent Pricing and the Non-Neutrality of Money

David Demery ()

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: Golosov and Lucas (2007) have challenged the view that infrequent price adjustments by firms explains 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 equilibrium. 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 to a level comparable to that of the Calvo (1983) pricing model.

Keywords: menu-cost; information costs; non-neutrality of money; state-dependent pricing; time-dependent pricing. (search for similar items in EconPapers)
JEL-codes: E30 E31 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2010-09
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Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:10/615

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