State-dependent pricing and the general equilibrium dynamics of money and output

Economists have long suggested that nominal product prices are changed infr equently because of fixed costs. In such a setting, optimal price adjustmen t should depend on the state of the economy. Yet, while widely discussed, s tate-dependent pricing has proved difficult to incorporate into macroeconom ic models. This paper develops a new, tractable theoretical state-dependent pricing framework. We use it to study how optimal pricing depends on the p ersistence of monetary shocks, the elasticities of labor supply and goods d emand, and the interest sensitivity of money demand.