DP12638 Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks
We analyze a sticky price model where firms choose a price plan, namely a set of two prices. Changing the plan entails a “menu cost”, but either price in the plan can be charged at any point in time. We analytically solve for the optimal policy and for the output response to a monetary shock. The setup rationalizes the coexistence of many price changes, most of which are temporary, with a modest flexibility of the aggregate price level. We present evidence consistent with the model implications using CPI data for Argentina across a wide range of inflation rates.