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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Sticky Prices, No Menu Costs
David Bowman
2002-743  (December 2002)

Abstract:  A model that contains no costs to changing prices but in which prices do not respond to nominal shocks is presented. In models that do not feature superneutrality of money flexible price equilibria will allow certain types of monetary shocks to affect the real economy. Sticky price behavior may in fact be better at protecting the real economy from the effects of monetary shocks in such environments. This point is demonstrated in a standard monetary model with liquidity effects. An equilibrium in which sticky prices are supported without menu costs is then constructed. In equilibrium firms choose to keep prices fixed in response to nominal shocks because doing so provides a service to their customers, increasing profits by expanding the customer base.

Full paper (361 KB PDF)

price adjustment, optimality

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