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Sticky prices, no menu costs

David Bowman

No 743, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: A model that contains no costs to changing prices but in which prices do not respond to nominal shocks is presented. In models that do not feature superneutrality of money flexible price equilibria will allow certain types of monetary shocks to affect the real economy. Sticky price behavior may in fact be better at protecting the real economy from the effects of monetary shocks in such environments. This point is demonstrated in a standard monetary model with liquidity effects. An equilibrium in which sticky prices are supported without menu costs is then constructed. In equilibrium firms choose to keep prices fixed in response to nominal shocks because doing so provides a service to their customers, increasing profits by expanding the customer base.

Keywords: Prices; Monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-ind
Date: 2002
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