Sticky prices: A new monetarist approach

Allen Head, Lucy Qian Liu, Guido Menzio, Randall Wright

    Research output: Contribution to journalArticle

    Abstract

    Why do some sellers set nominal prices that apparently 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 the money supply increases, some sellers may keep prices constant, earning less per unit but making it up on volume so profit stays constant. The calibrated model matches price-change data well. But, in contrast to typical sticky-price models, money is neutral.

    Original languageEnglish (US)
    Pages (from-to)939-973
    Number of pages35
    JournalJournal of the European Economic Association
    Volume10
    Issue number5
    DOIs
    StatePublished - Oct 1 2012

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    Sticky prices
    Seller
    Profit
    Price changes
    Price level
    Price distribution
    Search theory
    Money supply
    Medium of exchange

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)

    Cite this

    Sticky prices : A new monetarist approach. / Head, Allen; Liu, Lucy Qian; Menzio, Guido; Wright, Randall.

    In: Journal of the European Economic Association, Vol. 10, No. 5, 01.10.2012, p. 939-973.

    Research output: Contribution to journalArticle

    Head, Allen ; Liu, Lucy Qian ; Menzio, Guido ; Wright, Randall. / Sticky prices : A new monetarist approach. In: Journal of the European Economic Association. 2012 ; Vol. 10, No. 5. pp. 939-973.
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