Firms choose how they respond to economic shocks, and that choice changes how money works

This paper builds a model where companies decide whether to set prices or production quantities. It turns out this choice fundamentally changes how economic shocks, like changes in the money supply, affect the economy. For example, if companies focus on quantities, changes in the money supply have no real effect, but if they focus on prices, those changes matter a lot.

Economists have long debated how monetary policy actually works, and why its effects seem to change over time. This paper suggests that the internal decisions of companies, specifically whether they prioritize prices or quantities, can explain some of that variability. It means that central banks might need to understand these company-level choices to predict how their policies will play out.