THE QUARTERLY JOURNAL OF ECONOMICS Vol. CII November 1987 Issue 4 MENU COSTS AND THE NEUTRALITY OF MONEY* ANDREW S. CAPLIN AND DANIEL F SPULBER A model of endogenous price adjustment under money growth is presented Firms follow(s, S)pricing policies, and price revisions are imperfectly synchronize In the aggregate, price stickiness disappears, and money is neutral. The connection etween firm price adjustment and relative price variability in the presence of onetary growth is also investigated. The results contrast with those obtained in models with exogenous fixed timing of price adjustment. INTRODUCTION Historically determined nominal prices can lead to inertia in the aggregate level of prices, leaving room for monetary shocks to influence real variables. Formal models connecting the microeco nomic behavior of nominal prices with aggregate price stickiness lude models with staggered price and decisions [Fischer 1977; Taylor, 1980; Blanchard, 1983; Parkin, 1986], models with partial adjustment of prices(e. g, Rotemberg [1982]), and the more recent"menu cost"models of Akerlof and Yellen [1985], Blanchard and Kiyotaki 1985], and Mankiw [1985]. We present an alternative aggregate model with microeconomic price stickiness that empha sizes the importance of endogenous timing of price adjustments The model provides conditions under which money shocks have no real effects a number of macroeconomic models of price stickiness have a common microeconomic base: infrequent but large changes in *We thank a o. SES-82-19121. The paper was nted at the WBER Progress o the noc metrist society, Cambridge, M A 1 985, and at the e 1987 by the President and Fellows of Harvard College and the Massachusetts Institute of The quarterly Journal of Economics, ovember 1987THE QUARTERLY JOURNAL OF ECONOMICS Vol. CII November 1987 Issue 4 MENU COSTS AND THE NEUTRALITY OF MONEY* ANDREWS. CAPLINAND DANIELF. SPULBER A model of endogenous price adjustment under money growth is presented. Firms follow (s,S) pricing policies, and price revisions are imperfectly synchronized. In the aggregate, price stickiness disappears, and money is neutral. The connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated. The results contrast with those obtained in models with exogenous fixed timing of price adjustment. Historically determined nominal prices can lead to inertia in the aggregate level of prices, leaving room for monetary shocks to influence real variables. Formal models connecting the microeco￾nomic behavior of nominal prices with aggregate price stickiness include models with staggered price and wage decisions [Fischer, 1977; Taylor, 1980; Blanchard, 1983; Parkin, 19861, models with partial adjustment of prices (e.g., Rotemberg [1982]), and the more recent "menu cost" models of Akerlof and Yellen [1985], Blanchard and Kiyotaki [1985], and Mankiw [1985]. We present an alternative aggregate model with microeconomic price stickiness that empha￾sizes the importance of endogenous timing of price adjustments. The model provides conditions under which money shocks have no real effects. A number of macroeconomic models of price stickiness have a common microeconomic base: infrequent but large changes in *We thank Andrew Abel, Roland Benabou, Olivier Blanchard, Dennis Carlton, Stanley Fischer, Benjamin Friedman, Barry Nalebuff, William Nordhaus, David Romer, Julio Rotemberg, Eytan Sheshinski, John Veitch, and an anonymous referee for valuable comments. Spulber's research was supported by the National Science Foundation under Grant No. SES-82-19121. The paper was presented at the Fifth World Congress of the Econometric Society, Cambridge, MA, 1985, and at the NBER Program in Economic Fluctuations Conference, October, 1985. o 1987 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology. The Quarterly Journal of Economics, November 1987