Premio Anual de Investigación Económica “Dr. Raúl Prebisch”
Price Plans and the Real Effects of Monetary Policy
Fernando Alvarez
2016-12-14 - We analyze a sticky price model where a firm chooses a price plan, namely a set of 2 prices. Changing the plan entails a “menu cost”, but either price in the plan can be charged at any point in time. We analytically solve for the optimal policy and for the output response to a monetary shock. The setup generates a persistent reference price level and short lived deviations from it, as well as a decreasing hazard function for price changes, consistent with some datasets. We show that the temporary price changes substantially increase the flexibility of the aggregate price level.