Sticky Prices: A New Monetarist Approach

JEL codes: 
E31, E42, E52
Version Date: 
Jan 2012

Why do some sellers set nominal prices that apparently do not respond to changes in
the aggregate price level? In many models, prices are sticky by assumption; here it
is a result. We use search theory, with two consequences: prices are set in dollars,
since money is the medium of exchange; and equilibrium implies a nondegenerate
price distribution. When the money supply increases, some sellers may keep prices
constant, earning less per unit but making it up on volume so profit stays constant.
The calibrated model matches price-change data well. But, in contrast to typical
sticky-price models, money is neutral.

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