On Inflation and Output with Costly Price Changes: A Simple Unifying Result
NBER Technical Working Paper No. 135
We analyze the effect of inflation on the average output of monopolistic firms facing a small fixed cost of changing nominal prices. Using Taylor expansions, we derive a general closed-form solution for the slope of the long-run Phillips curve. This very simple, unifying formula allows us to evaluate and clarify the role of three key factors: the asymmetry of the profit function, the convexity of the demand function, and the discount rate. These partial equilibrium effects remain important components of any general equilibrium model with (s,S) pricing.
Published: American Economic Review, vol.84, March 1994, pp.290-297.