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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 recent years there has been an abundance of empirical work examining price setting behavior at the micro level. First generation models with price setting rigidities were generally at odds with much of the micro price data. A second generation of models, with fixed costs of price adjustment and idiosyncratic shocks, have attempted to rectify this shortcoming. Using a model that matches a large set of microeconomic facts we find significant nonneutrality. We decompose the nonneutrality and find that state-dependence plays an important part in the responses of output and inflation to a monetary shock. We also examine how aggregating firm behavior can generate .at hazards. Lastly we find that the steady state statistic developed by Alvarez, Le Bihan, and Lippi (2016) is an imperfect guide to characterizing nonneutrality in our model.

Suggested Citation

  • Michael Dotsey & Alexander L. Wolman, 2019. "Investigating Nonneutrality in a State-Dependent Pricing Model with Firm-Level Productivity Shocks," Working Papers 19-9, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:19-9
    DOI: 10.21799/frbp.wp.2019.09
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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. Alberto Cavallo & Francesco Lippi & Ken Miyahara, 2024. "Large Shocks Travel Fast," American Economic Review: Insights, American Economic Association, vol. 6(4), pages 558-574, December.
    6. Carvalho, Carlos & Kryvtsov, Oleksiy, 2021. "Price selection," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 56-75.

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    Keywords

    price-modeling;

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