State-dependent pricing and its implications for monetary policy

Strong evidence now exists both in macro and micro data that price/wage durations are depent on the state of the economy and especially inflation. We embed this dependence in a macro model of the US that otherwise does well in matching the economy s behaviour in the last three decades; it now also matches it over the whole post-war period. This nding implies a major role for monetary policy in influencing the economy s price stickiness. We nd that by targetin nominal GDP monetary policy can achieve high price stability while also preventing large cyclical output fluctuations.