Menu Costs and the Neutrality of Money

Abstract

A model of endogenous price adjustment under money growth is presented. Firma follow (a, S) pricing policies and price revisions are imperfectly synchronized. In the aggregate, price stickiness disappears and money is neutral. The connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated. The results contrast with those obtained in models with exogenous fixed timing of price adjustment.

Variations in risk and fluctuations in demand: A theoretical model

“…The flow of purchases and its sensitivity to aggregate shocks is thus determined by the cross section distribution of individual deviations, particularly the density close to the limits. Caballero and Engel (1991) generalize the result in Caplin and Spulber (1987) and show that under some circumstances the cross-section distribution of deviations can be invariant under aggregate and idiosyncratic shocks. In this case individual inertia is irrelevant to aggregate behavior.…”

“…The smoothing effect aggregation may have is illustrated in Caplin and Spulber (1987), who show that individual inertia can disappear after aggregation. In Ss models, an individual only acts when the deviation of her control variable from the target reaches a limit of the Ss band.…”

State-dependent pricing and the non-neutrality of money

“…Like Caplin and Spulber (1987) adjustments observed in the micro data and recently analysed in Klenow and Kryvtsov (2008), Nakamura and Steinsson (2008) and Midrigan (2011). For example Klenow and Kryvtsov find that the mean absolute price change is around 10% but 44% of prices changes are less than 5% in absolute value.…”

Reconsidering the natural rate hypothesis in a New Keynesian framework

“…However, in order to maintain a certain level of analytic tractability, we exploit a kind of median voter theorem. 8 Specifically, the median firm among firms with sticky-price contracts is required to choose the mean duration of the sticky-price contract. Given the mean duration of the sticky-price contract, individual firms decide on whether to choose sticky-price or flexible-price contracts.…”