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Sticky prices and monetary policy shocks

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Author Info

  • Mark Bils
  • Peter J. Klenow
  • Oleksiy Kryvtsov

Abstract

Models with sticky prices predict that monetary policy changes will affect relative prices and relative quantities in the short run because some prices are more flexible than others. In U.S. micro data, the degree of price stickiness differs dramatically across consumption categories. This study exploits that diversity to ask whether popular measures of monetary shocks (for example, innovations in the federal funds rate) have the predicted effects. The study finds that they do not. Short-run responses of relative prices have the wrong sign. And monetary policy shocks seem to have persistent effects on both relative prices and relative quantities, rather than the transitory effects one would expect from differences in price flexibility across goods. The findings reject the joint hypothesis that the sticky-price models typically employed in policy analysis capture the U.S. economy and that commonly used monetary policy shocks represent exogenous shifts.

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Bibliographic Info

Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (2003)
Issue (Month): Win ()
Pages: 2-9

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Handle: RePEc:fip:fedmqr:y:2003:i:win:p:2-9:n:v.27no.1

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Related research

Keywords: Prices ; Monetary policy;

References

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  2. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
  3. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  4. Jonathan L. Willis, 2000. "Estimation of adjustment costs in a model of state-dependent pricing," Research Working Paper RWP 00-07, Federal Reserve Bank of Kansas City.
  5. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
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