Models of State-Dependent Pricing

Models of state-dependent pricing envisage firms setting prices in the face of some or other costs of price adjustment. In the face of two-sided shocks (nominal shocks that may be positive or negative), then the macroeconomy can display money-output correlations in the nature of a Phillips curve. However, to date these models display somewhat simplistic dynamics; the response of output to money is one-for-one, over some range, and once a boundary is reached money variations tend to show up only in price variations. This research is intended to extend this line of thought by incorporating heterogeneous firms. Preliminary results suggest that the impact of monetary shocks are somewhat more nuanced than in the simple representative firm set-up. In
	Ss Pricing with Two Sectors
our model, monetary shocks have more impact on output when inflation is low, and less impact on output when inflation is high. We also investigate the impact on output volatility of increasing the variance of nominal shocks and find that we overturn some existing results in the literature.

Researchers: Vladislav Damjanovic and Charles Nolan

Related CDMA Working Papers:

0505	Vladislav Damjanovic (St Andrews) and Charles Nolan (St Andrews)	'Aggregate Dynamics with Heterogeneous Agents and State-Dependent Pricing'.
0506	Vladislav Damjanovic (St Andrews) and Charles Nolan (St Andrews)	'Aggregation and Optimization with State-Dependent Pricing: A Comment'. Forthcoming in Econometrica.
0709	Vladislav Damjanovic (St Andrews) and Charles Nolan (St Andrews)	'S,s Pricing in General Equilibrium Models with Heterogeneous Sectors'.