Non-Constant Hazard Function and Inflation Dynamics

Abstract

This paper studies implications of the price reset hazard function for the monetary transmission mechanism of sticky price models. I first document some general analytical results that highlight the central role of the price (accumulative) distribution in linking the hazard function at the micro level and the impulse response function at the macro level. In addition, I investigate how increasing hazard functions interact with other important features of modern monetary models, such as strategic complementarity in price-setting, non-zero steady-state inflation and monetary policy rules. I find that nominal rigidity underlying increasing hazard functions is more successful than real rigidity in generating realistic macro persistence. Nevertheless, the interaction between the increasing hazard function and real rigidity provides a powerful propagation mechanism for monetary shocks.