David Domeij (Stockholm), 23.11.2022

We introduce price posting and information frictions into a
canonical monetary macro model. Despite costless price
adjustment, insufficient search incentives prevent market clearing.
The model has an interval of steady-state price levels. Under
successful inflation-targeting, the equilibrium price level is selected
by past shocks and policies. If a negative supply shock makes the
current price level unsustainable, both prices and mark-ups
immediately rise. Absent expansionary monetary or fiscal policy, the
higher mark-up persists even if the shock subsides.