State-Dependent Pricing and the New Keynesian Phillips Curve

We develop a model of state-dependent pricing that we can log-linearize and compare to the standard Calvo model. In one extreme case, money is neutral with state-dependent pricing even though the probability of price adjustment is constant as in the Calvo model. We use this example to illustrate some of the fundamental differences between the two pricing models. We then examine less extreme cases in which money has real effects with state-dependent pricing. We show how the slope of the Phillips curve depends on the microeconomic environment in which firms operate