Learning-by-doing and Endogenous Price-level Inertia

This paper presents a DGE model in which aggregate price level inertia is generated endogenously by the optimizing behaviour of price setting firms. All the usual sources of inertia are absent here ie., all firms are simultaneously free to change their price once every period and face no adjustment costs in doing so. Despite this, the model generates persistent movements in aggregate output and in\u2021ation in response to a nominal shock. This occurs because firms temper their desire to raise prices after a positive money growth shock in order to learn and lower future costs.