The nature of price dynamics has long been thought important for the origin and duration of business cycles. To investigate this topic, we construct a dynamic stochastic general equilibrium macroeconomic model in which monopolistically competitive firms face fixed costs of changing the nominal...

In models with sticky prices and monopolistic competition, the cyclical behavior of real marginal cost is a key determinant of firms' pricing decisions. Necessarily then, such behavior is closely linked to the corresponding cyclical behavior of inflation. Recent empirical work on this link...

According to standard monetary theory, optimal monetary policy involves slight deflation. Central banks, however, advocate zero inflation. Is there a significant welfare difference between zero inflation and optimal deflation? The answer hinges on the behavior of money demand at low nominal...

Optimal monetary policy maximizes welfare, given frictions in the economic environment. Constructing a model with two sets of frictions - the Keynesian friction of costly price adjustment by imperfectly competitive firms and the Monetarist friction of costly exchange of wealth for goods - we...

How often do the nominal prices of individual goods change? What is the nature and magnitude of costs of price adjustment? Economists seeking to construct macroeconomic models useful for monetary policy analysis must know the answers to these questions. The empirical literature reveals that many...

Does the zero bound on nominal interest rates constitute an argument against low inflation? The Federal Reserve implements monetary policy with nominal interest rates, which tend to be low when inflation is low. However, in an optimizing model with staggered price setting, the zero bound does...

We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply. The steady-state inflation rate is above 8 percent for a baseline calibration, but it varies substantially with alternative structural parameter values. If the initial condition...

In the last ten years there has been an explosion of empirical work examining price setting behavior at the micro level. The work has in turn challenged existing macro models that attempt to explain monetary nonneutrality, because these models are generally at odds with much of the micro price...

This paper studies payment variation across locations and time using five years of transactions data from a large discount retail chain with hundreds of stores across the Fifth District. The results show that the median transaction size, demographics, education levels, and state fixed effects...

We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply, producing three main contributions. First, the model delivers a unique private-sector equilibrium for a broad range of parameterizations, in contrast to earlier results for the...