Abstract :
State-dependent pricing (SDP) models treat the timing of price changes as a profitmaximizing
choice, symmetrically with other decisions of firms. Using quantitative general
equilibrium models which incorporate a ‘‘generalized ðS; sÞ approach,’’ we investigate the
implications of SDP for topics in two major areas of macroeconomic research, the early
1990s SDP literature and more recent work on persistence mechanisms. First, we show
that state-dependent pricing leads to unusual macroeconomic dynamics, which occur
because of the timing of price adjustments chosen by firms as in the earlier literature.
In particular, we display an example in which output responses peak at about a year,
while inflation responses peak at about 2 years after the shock. Second, we examine
whether the persistence-enhancing effects of two New Keynesian model features,
namely specific factor markets and variable elasticity demand curves, depend importantly
on whether pricing is state dependent. In an SDP setting, we provide examples in whichspecific factor markets perversely work to lower persistence, while variable elasticity demand
raises it.
r 2004 Published by Elsevier B.V.
