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Investigating Nonneutrality In A State‐Dependent Pricing Model With Firm‐Level Productivity Shocks

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  • Michael Dotsey
  • Alexander L. Wolman

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.

Suggested Citation

  • Michael Dotsey & Alexander L. Wolman, 2020. "Investigating Nonneutrality In A State‐Dependent Pricing Model With Firm‐Level Productivity Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(1), pages 159-188, February.
    • Handle: RePEc:wly:iecrev:v:61:y:2020:i:1:p:159-188
    DOI: 10.1111/iere.12420
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    Cited by:

    1. Alberto Cavallo & Francesco Lippi & Ken Miyahara, 2023. "Large Shocks Travel Fast," NBER Working Papers 31659, National Bureau of Economic Research, Inc.
    2. Lippi, Francesco & Alvarez, Fernando & Ferrara, Andrea & Gautier, Erwan & Le Bihan, Hervé, 2021. "Empirical Investigation of a Sufficient Statistic for Monetary Shocks," CEPR Discussion Papers 16626, C.E.P.R. Discussion Papers.
    3. Fernando Alvarez & Francesco Lippi & Aleksei Oskolkov, 2023. "The Macroeconomics of Sticky Prices with Generalized Hazard Functions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(2), pages 989-1038.
    4. Kevin XD Huang & Nam T Vu, 2019. "Rare but Long-lasting Liquidity Traps and Fiscal Stimulus," Vanderbilt University Department of Economics Working Papers 19-00014, Vanderbilt University Department of Economics.
    5. Carvalho, Carlos & Kryvtsov, Oleksiy, 2021. "Price selection," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 56-75.

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