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Explaining hump-shaped inflation responses to monetary policy shocks

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  • James Yetman

    (University of Hong Kong, Hong Kong)

Abstract

According to conventional wisdom, the output effects of a monetary policy shock commence within months of the shock, while most inflationary effects lag significantly. We demonstrate a simple model that can explain the conventional wisdom and is consistent with profit maximizing price setting decisions by firms, based on the assumption that renegotiating existing contracts is costly. Thus, firms jointly choose both their price and the expected length of time for which that price will hold each time they re-contract. We show that such a 'sticky contracting' assumption, combined with menu costs, generates a hump-shaped inflation response to monetary policy shocks. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1326
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 28 (2007)
Issue (Month): 6 ()
Pages: 605-617

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Handle: RePEc:wly:mgtdec:v:28:y:2007:i:6:p:605-617

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. Jean-Pascal Bénassy, 2003. "Staggered contracts and persistence : microeconomic foundations and macroeconomic dynamics," Recherches économiques de Louvain, De Boeck Université, vol. 69(2), pages 125-144.
  2. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
  3. Carvalho, Carlos Viana de & Bonomo, Marco Antônio Cesar, 2005. "Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing," Economics Working Papers (Ensaios Economicos da EPGE) 600, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  5. Anil K Kashyap, 1994. "Sticky Prices: New Evidence from Retail Catalogs," NBER Working Papers 4855, National Bureau of Economic Research, Inc.
  6. Shantanu Dutta & Mark Bergen & Daniel Levy & Robert Venable, 2005. "Menu Costs, Posted Prices, and Multiproduct Retailers," Macroeconomics 0505007, EconWPA.
  7. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  8. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
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Cited by:
  1. Levy, Daniel, 2007. "Price Rigidity and Flexibility: Recent Theoretical Developments," MPRA Paper 2761, University Library of Munich, Germany.
  2. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.

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