A discretionary policy-maker responds to the state of the economy each period. Private agents' current behavior determines the future state based on expectations of future policy. Discretionary policy thus can lead to dynamic complementarity between private agents and a policy-maker, which in...

Economists have long suggested that nominal product prices are changed infrequently because of fixed costs. In such a setting, optimal price adjustment should depend on the state of the economy. Yet, while widely discussed, statedependent pricing has proved difficult to incorporate into...