Selection and monetary non-neutrality in time-dependent pricing models |
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| Affiliation: | 1. PUC-Rio, Brazil;2. Federal Reserve Bank of Richmond, United States;1. Accounting and Finance Group, Manchester Business School, University of Manchester, Booth Street West, Manchester M15 6PB, UK;2. Department of Economics, Boston University, 270 Bay State Road, Boston MA 02215, USA;3. CEMA, Central University of Finance and Economics, Beijing, China;4. AFR, Zhejiang University, Hangzhou, China;1. University of Zurich, Department of Banking and Finance, Switzerland;2. European Central Bank, Germany;3. Swiss Finance Insitute, Switzerland;4. University of Zurich, Department of Business Administration, Switzerland;1. Money Market, Swiss National Bank, Boersenstrasse 15, 8022 Zurich, Switzerland;2. Financial Stability – Oversight, Swiss National Bank, Bundesplatz 1, 3003 Bern, Switzerland |
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| Abstract: | For a given frequency of price adjustment, monetary non-neutrality is smaller if older prices are disproportionately more likely to change. Selection for the age of prices provides a complete characterization of price-setting frictions in time-dependent models. Selection for older prices is weaker and non-neutralities are larger if the hazard function of price adjustment is less strongly increasing. Selection is weaker if there is heterogeneity in price stickiness. Finally, selection is weaker if durations of price spells are more variable. In particular, the Taylor (1979) model exhibits maximal selection for older prices, whereas the Calvo (1983) model exhibits no selection. |
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| Keywords: | Time-dependent pricing Selection effect Monetary non-neutrality General hazard function Heterogeneity |
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