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 flat hazards. Last, 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.
Investigating Nonneutrality in a State-Dependent Pricing Model with Firm-Level Productivity Shocks
WP 19-09 - In recent years, there has been an abundance of empirical work examining price setting behavior at the micro level.