We present a sticky price model that features the coexistence of many price changes, most of which are temporary, with a modest flexibility of the aggregate price level. Stickiness is introduced in the form of a price plan, namely a set of two prices: either price can be charged at any moment but changing the plan entails a menu cost. We analytically solve for the optimal plan and for the aggregate output response to a monetary shock. We present evidence consistent with the model implications using scanner data, as well as Consumer Price Index data across a wide range of inflation rates.
Alvarez, Fernando, and Francesco Lippi.
"Temporary Price Changes, Inflation Regimes, and the Propagation of Monetary Shocks."
American Economic Journal: Macroeconomics,
Firm Behavior: Empirical Analysis
Price Level; Inflation; Deflation
Production, Pricing, and Market Structure; Size Distribution of Firms
Macroeconomic Analyses of Economic Development
Fiscal and Monetary Policy in Development