Working Paper: NBER ID: w17520
Authors: Allen Head; Lucy Qian Liu; Guido Menzio; Randall Wright
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 with other sticky-price models, money is neutral.
Keywords: Sticky Prices; Monetarist Approach; Search Theory
JEL Codes: E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price stickiness (L11) | search frictions in markets (D47) |
| money supply changes (E51) | real output (E23) |
| inflation (E31) | frequency of price changes (E30) |
| inflation (E31) | magnitude of price changes (E30) |
| price stickiness (L11) | non-neutrality of money (E49) |