Delivering endogenous inertia in prices and output

This paper presents a DGE model in which aggregate price level inertia is generated endogenously by the optimizing behavior of price-setting firms. All the usual sources of inertia are absent here i.e., all firms are simultaneously free to change their price once every period and face no adjustment costs in doing so. Despite this, the model generates persistent movements in aggregate output and inflation in response to a nominal shock. Two …