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Federal Reserve Bank of Philadelphia
Working Papers
Investigating Nonneutrality in a State-Dependent Pricing Model with Firm-Level Productivity Shocks
Michael Dotsey
Alexander L. Wolman
Abstract

In recent years there has been an abundance of empirical work examining price setting behavior at the micro level. First generation models with price setting rigidities were generally at odds with much of the micro price data. A second generation of models, with fixed costs of price adjustment and idiosyncratic shocks, have attempted to rectify this shortcoming. Using a model that matches a large set of microeconomic facts we find significant nonneutrality. We decompose the nonneutrality and find that state-dependence plays an important part in the responses of output and inflation to a monetary shock. We also examine how aggregating firm behavior can generate .at hazards. Lastly we find that the steady state statistic developed by Alvarez, Le Bihan, and Lippi (2016) is an imperfect guide to characterizing nonneutrality in our model.


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Michael Dotsey & Alexander L. Wolman, Investigating Nonneutrality in a State-Dependent Pricing Model with Firm-Level Productivity Shocks, Federal Reserve Bank of Philadelphia, Working Papers 19-9, 31 Jan 2019.
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Keywords: price-modeling
DOI: 10.21799/frbp.wp.2019.09
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