Implications of state-dependent pricing for DSGE model-based policy analysis in Indonesia

This paper builds a small open economy dynamic stochastic general equilibrium (DSGE) model for Indonesia with state-dependent pricing (SDP) and studies its implications policy analysis. Variations in the extensive margin of price adjustment under SDP are shown to non-trivially affect model-generated variance decompositions impulse responses various shocks. DSGE model-based analyses conducted without this feature might therefore lead inaccurate prescriptions. In particular, would call greater degree monetary easing response COVID-19 pandemic, than that prescribed by standard time-dependent (TDP) model.