Carlos Carvalho and Felipe F. Schwartzman
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.
Our Research Focus: Inflation and Monetary Policy