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Equilibrium Price Dispersion and Rigidity: A New Monetarist Approach

Author

Listed:
  • Allen Head

    (Department of Economics, Queen's University)

  • Lucy Qian Liu

    (International Monetary Fund (IMF))

  • Guido Menzio

    (Department of Economics, University of Pennsylvania)

  • Randall Wright

    (Department of Economics, University of Wisconsin-Madison)

Abstract

Why do some sellers set prices in nominal terms that do not respond to changes in the aggregate price level? In many models, prices are sticky by assumption. Here it is a result. We use search theory, with two consequences: prices are set in dollars since money is the medium of exchange; and equilibrium implies a nondegenerate price distribution. When money increases, some sellers keep prices constant, earning less per unit but making it up on volume, so profit is unaffected. The model is consistent with the micro data. But, in contrast with other sticky-price models, money is neutral.

Suggested Citation

  • Allen Head & Lucy Qian Liu & Guido Menzio & Randall Wright, 2010. "Equilibrium Price Dispersion and Rigidity: A New Monetarist Approach," PIER Working Paper Archive 10-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:10-034
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    File URL: https://economics.sas.upenn.edu/sites/default/files/filevault/working-papers/10-034.pdf
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    References listed on IDEAS

    as
    1. Boragan Aruoba, S. & Rocheteau, Guillaume & Waller, Christopher, 2007. "Bargaining and the value of money," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2636-2655, November.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Precautionary price stickiness
      by Christian Zimmermann in NEP-DGE blog on 2011-09-08 08:03:46

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    Cited by:

    1. Becker, Sascha S. & Nautz, Dieter, 2012. "Inflation, price dispersion and market integration through the lens of a monetary search model," European Economic Review, Elsevier, vol. 56(3), pages 624-634.
    2. Rodolfo E. Manuelli & Adrian Peralta-Alva, 2011. "\\"Frictions in financial and labor markets\\": a summary of the 35th Annual Economic Policy Conference," Review, Federal Reserve Bank of St. Louis, vol. 93(July), pages 273-292.
    3. Famoroti Jonathan Olusegun & Adeleke Omolade, 2022. "Impact of monetary policy transmission mechanism in West African countries," Studia Universitatis „Vasile Goldis” Arad – Economics Series, Sciendo, vol. 32(1), pages 20-42, March.
    4. Boivin, Jean & Clark, Robert & Vincent, Nicolas, 2012. "Virtual borders," Journal of International Economics, Elsevier, vol. 86(2), pages 327-335.
    5. Liang Wang, 2011. "Inflation and Welfare with Search and Price Dispersion," Working Papers 201113, University of Hawaii at Manoa, Department of Economics.

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    More about this item

    Keywords

    Search; Sticky Prices; Monetary Policy;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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