Aggregate Dynamics with Heterogeneous Agents and State-Dependent Pricing

Abstract

This paper examines the consequences of (S, s) pricing rules in a dynamic economy with heterogeneous costs of price adjustment. We construct the stationary distributions for aggregate output and prices for our model economy. As a result of our assumption of heterogeneous costs we find that: (i) Some sectors change prices more regularly than others; (ii) Price changes are asynchronized (relative prices may be moving in opposite directions in different sectors); (iii) The economy may be more sensitive to demand shocks. There is broad empirical support for the predictions of the model.

Keywords: Price rigidity, (S, s) pricing, macroeconomic dynamics

JEL Classification: E31, E32, E37, E58