Can More Frequent Price Changes Lead to Price Inertia? Nonneutralities in a State-Dependent Pricing Context.

The authors present a generalized (s,S) state-dependent pricing model in which menus are changed, not just in response to price misalignment but also in response to factors such as changing product mix. Their model generates aggregate price inertia, and so reverses an important earlier result on neutrality in state-dependent pricing contexts in more general settings than previous modifications. It also provides a compromise between state- and time-dependent rules, gives a glimpse at the dynamic implications of menu cost models, and reproduces two recent results: one on Phillips curve slopes and one on asymmetric fluctuations. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.