Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks
- American Economic Journal: Macroeconomics (Forthcoming)
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 CPI data across a wide range of inflation rates.
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