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

30 Pages Posted: 22 May 2020

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: February 2020

Abstract

In a model with fixed cost of price adjustment and idiosyncratic shocks, two parameterizations match a large set of microeconomic facts, yet display different degrees of nonneutrality. Although there is substantial nonneutrality in both cases, the model does not behave like a time‐dependent model, as changes in the distribution of firms account for roughly a third of the short‐run response of the price level to a monetary shock. We use the model to examine how aggregating firm behavior can generate flat hazards; we also find that a recently developed steady‐state statistic is an imperfect guide to characterizing nonneutrality.

Suggested Citation

Dotsey, Michael and Wolman, Alexander L., Investigating Nonneutrality in a State‐Dependent Pricing Model with Firm‐Level Productivity Shocks (February 2020). International Economic Review, Vol. 61, Issue 1, pp. 159-188, 2020, Available at SSRN: https://ssrn.com/abstract=3602119 or http://dx.doi.org/10.1111/iere.12420

Michael Dotsey (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Alexander L. Wolman

Federal Reserve Bank of Richmond ( email )

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

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