AGGREGATION AND OPTIMIZATION WITH STATE-DEPENDENT PRICING

The literature on the aggregation of (S, s) policies has ignored the i mpact of aggregate behavior on the individual's optimization problem. In the case of pricing, the feedback effects are clear. Not only do pr icing strategies determine the evolution of the price level, but the e volution of the price level also influences the optimal pricing strate gies. In this paper, we provide a consistent treatment of aggregation and optimization. We use this model to analyze three issues in the men u cost pricing literature: the relationship between strategic compleme ntarity and the real effects of money; the relationship between the va riance of the money supply and the correlation between money and outpu t; and the relationship between the cost of price adjustment and the s ize of price adjustment.