Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models
38 Pages Posted: 29 Nov 2012 Last revised: 20 Jul 2018
Date Written: August 20, 2015
For a given frequency of price adjustment, monetary non-neutrality is smaller if older prices are disproportionately more likely to change. This type of selection for the age of prices provides a complete characterization of price-setting frictions in time-dependent sticky-price models. Selection for older prices is weaker if: 1) the hazard function of price adjustment is less strongly increasing; 2) there is sectoral heterogeneity in price stickiness; 3) durations of price spells are more variable. Weaker selection for old prices implies larger monetary non-neutralities. In particular, the Taylor (1979) model exhibits maximal selection for older prices, whereas the Calvo (1983) model exhibits no selection.
Keywords: time-dependent pricing, monetary non-neutrality, general hazard function, selection effect, heterogeneity
JEL Classification: E10, E30
Suggested Citation: Suggested Citation