Working Papers

December 2012, No. 12-09R

Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models (Revised May 2015)

Carlos Carvalho and Felipe Schwartzman

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.

Our Research Focus: Inflation and Monetary Policy

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