Pricing Mistakes and the Non-Neutrality of Money
Standard sticky-price models assume firms reset prices without error. Using UK and Argentine price microdata, I document that consecutive regular price changes are negatively correlated, more strongly at higher adjustment frequencies, and with negligible correlation beyond one spell. A large class of standard models cannot jointly match these facts, but models with idiosyncratic pricing mistakes can. I ask how mistakes affect monetary policy’s real effects. First, even when firms perfectly observe monetary shocks, adding mistakes to a standard model can increase cumulative output effects by changing which firms adjust prices. Second, once mistakes are possible, these real effects are completely unidentified from standard micro moments (frequency and kurtosis of price changes) because mistakes distort them. I restore identification with a sufficient-statistics result, by adding predictability coefficients. Accounting for mistakes implies around 50% larger real effects in the UK data.