Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models

36 Pages Posted: 20 Dec 2012 Last revised: 12 May 2015

See all articles by Carlos Carvalho

Carlos Carvalho

Asset 1 Investment Company; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Felipe F. Schwartzman

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: May 8, 2015

Abstract

For a given frequency of price changes, the real effects of a monetary shock are smaller if adjusting firms are disproportionately likely to have last set their prices before the shock. This type of selection for the age of prices provides a complete characterization of the nature of pricing frictions in time-dependent sticky-price models. In particular: 1) The Taylor (1979) model exhibits maximal selection for older prices, whereas the Calvo (1983) model exhibits no selection; 2) Selection for older prices is weaker and real effects are larger if the hazard function of price adjustment is less strongly increasing; 3) Selection is weaker if there is sectoral heterogeneity in price stickiness; 4) Selection is weaker if the durations of price spells are more variable.

Keywords: price setting, monetary non-neutrality, general hazard function, selection effect, heterogeneity

JEL Classification: E10, E30

Suggested Citation

Carvalho, Carlos and Schwartzman, Felipe F., Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models (May 8, 2015). FRB Richmond Working Paper No. 12-09R, Available at SSRN: https://ssrn.com/abstract=2191166 or http://dx.doi.org/10.2139/ssrn.2191166

Carlos Carvalho

Asset 1 Investment Company ( email )

Avenida Juscelino Kubitschek, 1600/Conj 52
São Paulo, São Paulo
Brazil

HOME PAGE: http://www.asset1.com.br

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

Felipe F. Schwartzman (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

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

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