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This paper analyzes the eects of monetary shocks in a DSGE model that allows for a general form of smoothly state-dependent pricing by …rms. As in Dotsey, King, and Wolman (1999) and Caballero and Engel (2007), our setup is based on one fundamental property: …rms are more likely to adjust their prices when doing so is more valuable. The exogenous timing (Calvo 1983) and …xed menu cost (Golosov and Lucas 2007) models are nested as limiting cases of our setup. Our model is calibrated to match the steady-state distribution of price adjustments in microdata; realism calls for …rm-speci…c shocks. Computing a dynamic general equilibrium requires us to calculate how the distribution of prices and productivities evolves over time. We solve the model using the method of Reiter (2008), which is well-suited to this type of problem because it combines a fully nonlinear treatment of …rm-level state variables with a linearization of the aggregate dynamics. We compute impulse responses to iid and autocorrelated money growth shocks, and decompose the in‡ation impact into 'intensive margin', 'extensive margin'and 'selection'components. Under our most successful calibration, increased money growth causes a persistent rise in in‡ation and output. The real eects are substantially larger if money growth is autocorrelated. In contrast, if we instead impose a …xed menu cost speci…cation, money growth shocks cause a sharp spike in in‡ation (via the selection component) so that the real eects are small and short-lived, especially if money growth is iid. An increase in aggregate productivity raises consumption but causes labor to fall. Also, impulse responses dier depending on the distribution at the time the shock occurs. In particular, increased money growth has dierent eects starting from the steady state distribution than it does if all …rms have recently received an economy-wide productivity shock.

Dynamics of the Price Distribution in a General Model of State-Dependent Pricing