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Price plans and the real effects of monetary policy

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  • Fernando Alvarez

    (University of Chicago)

  • Francesco Lippi

    (University of Sassari and EIEF)

Abstract

We analyze a sticky price model where a firm chooses a price plan, namely a set of 2 prices. Changing the plan entails a “menu cost”, but either price in the plan can be charged at any point in time. We analytically solve for the optimal policy and for the output response to a monetary shock. The setup generates a persistent reference price level and short lived deviations from it, as well as a decreasing hazard function for price changes, consistent with some datasets. We show that the temporary price changes substantially increase the flexibility of the aggregate price level.

Suggested Citation

  • Fernando Alvarez & Francesco Lippi, 2016. "Price plans and the real effects of monetary policy," EIEF Working Papers Series 1609, Einaudi Institute for Economics and Finance (EIEF), revised May 2016.
    • Handle: RePEc:eie:wpaper:1609
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    References listed on IDEAS

    as
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