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State-Dependent Pricing and the Non-Neutrality of Money

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  • David Demery

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.

Suggested Citation

  • David Demery, 2010. "State-Dependent Pricing and the Non-Neutrality of Money," Bristol Economics Discussion Papers 10/615, School of Economics, University of Bristol, UK.
    • Handle: RePEc:bri:uobdis:10/615
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    References listed on IDEAS

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    More about this item

    Keywords

    menu-cost; information costs; non-neutrality of money; state-dependent pricing; time-dependent pricing.;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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