MENU COSTS AND THE NEUTRALITY OF MONEY some positive demand even though prices are dispersed This may arise if the commodities are imperfect substitutes. It may also be that consumer search across firms is costly and that consumers do not recall prices posted by firms in earlier periods(see Benabou [1985b]) Costs are assumed to be fixed in real terms. Production at rate Xi(t) gives rise to real flow costs, C(X (t)). This assumption rules out stickiness in nominal input prices, including contractual wages This prevents us from addressing the relationship between price stickiness and wage stickiness, a topic of independent interest(see Blanchard [1983]). Additional study of the present model with input price stickiness is clearly desirable. All profits are distributed to consumers and firm costs accrue to consumers as income. The good is assumed to be nonstorable, so that the firms output is supplied at the same date it is produced. This removes intertemporal linkages embodied in inventories. As a result, the only variables that influence the firms flow rate of real profits B (t) are the instantaneous real price and the level of real money B, (t)= B[ri(t), M(t)-P(t) (5) max [e0X(t)-C(X(t)) x(t)≤rt) Thus, the output of firm i, X, (t), is a function of its real price and the level of real money balances which solves the problem in equation(5) X,(t)=X(r(t), M(t)-P(t)) Let X(t) represent the constant dollar value of aggregate output X(t)=1(q:(t)/Q(+)X, (t)di=Jo'e(,(t)di In the absence of menu costs, the firm picks its instantaneous price r (t)to maximize flow profits b(ri (t), M(t)-P(t)).Nominal price stickiness is introduced into the model in the form of a real 6. Gordon [1981] finds evidence for price stickiness for periods with wi diffe i址mn281 mple, Rote modity market implies market 7. By Walras'law, market clearing in he money market customers. The 9. with standard real money balances that increase demand for the commodity will also raise the firm s optimal real price-- MENU COSTS AND THE NEUTRUITY OF MONEY 707 some positive demand even though prices are dispersed. This may arise if the commodities are imperfect substitutes. It may also be that consumer search across firms is costly and that consumers do not recall prices posted by firms in earlier periods (see Benabou [1985b]). Costs are assumed to be fixed in real terms. Production at rate Xi(t) gives rise to real flow costs, C(Xi(t)). This assumption rules out stickiness in nominal input prices, including contractual wages. This prevents us from addressing the relationship between price stickiness and wage stickiness, a topic of independent interest (see Blanchard [1983]).6 Additional study of the present model with input price stickiness is clearly desirable. All profits are distributed to consumers, and firm costs accrue to consumers as income.' The good is assumed to be nonstorable, so that the firm's output is supplied at the same date it is produced. This removes intertemporal linkages embodied in inventories. As a result, the only variables that influence the firm's Bow rate of real profits B,(t) are the instantaneous real price and the level of real money balances:' Thus, the output of firm i, Xi(t), is a function of its real price and the level of real money balances which solves the problem in equation (5): Let X(t) represent the constant dollar value of aggregate output: In the absence of menu costs, the firm picks its instantaneous price ri(t) to maximize flow profits B(r,(t), M(t) - P(t)).' Nominal price stickiness is introduced into the model in the form of a real 6. Gordon [I9811 finds evidence for price stickiness for periods with widely different forms of labor contract. This suggests that there are important sources of price stickiness other than the behavior of input prices. 7. By Walras' law, market clearing in the commodity market implies market clearing in the money market; see, for example, Rotemberg [1982]. 8. The present formulation allows the firm to ration its customers. The case without rationing can also be handled by the model; see Sheshinski and Weiss 119831. 6 With standard assumptions, increases in real money balances that increase demand for the commodity will also raise the firm's optimal real price