Investigating Nonneutrality in a State-Dependent Pricing Model with Firm-Level Productivity Shocks

41 Pages Posted: 6 Feb 2019 Last revised: 21 Feb 2019

See all articles by Michael Dotsey

Michael Dotsey

Federal Reserve Bank of Philadelphia

Alexander L. Wolman

Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: 2019-01-31

Abstract

In recent years there has been an abundance of empirical work examining price setting behavior at the micro level. First generation models with price setting rigidities were generally at odds with much of the micro price data. A second generation of models, with fixed costs of price adjustment and idiosyncratic shocks, have attempted to rectify this shortcoming. Using a model that matches a large set of microeconomic facts we find significant nonneutrality. We decompose the nonneutrality and find that state-dependence plays an important part in the responses of output and inflation to a monetary shock. We also examine how aggregating firm behavior can generate .at hazards. Lastly we find that the steady state statistic developed by Alvarez, Le Bihan, and Lippi (2016) is an imperfect guide to characterizing nonneutrality in our model.

Keywords: price-modeling

Suggested Citation

Dotsey, Michael and Wolman, Alexander L., Investigating Nonneutrality in a State-Dependent Pricing Model with Firm-Level Productivity Shocks (2019-01-31). FRB of Philadelphia Working Paper No. 19-9. Available at SSRN: https://ssrn.com/abstract=3329765 or http://dx.doi.org/10.21799/frbp.wp.2019.09

Michael Dotsey (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
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804-697-8255 (Fax)

Alexander L. Wolman

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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