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Monetary Shocks with Observation and Menu Costs

Author

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  • Alvarez, Fernando
  • Lippi, Francesco
  • Paciello, Luigi

Abstract

We compute the impulse response of output to an aggregate monetary shock in a general equilibrium when firms set prices subject to a costly observation of the state and a menu cost. We study how the aggregate effects of a monetary shock depend on the relative size of these costs. We find that empirically reasonable observations costs increase the impact and the persistence of the output response to monetary shocks compared to models with menu cost only, flattening the shape of the impulse response function. Moreover we show that if the shocks are not large the results are independent of the assumption of whether firms know the realization of the monetary shock on impact.

Suggested Citation

  • Alvarez, Fernando & Lippi, Francesco & Paciello, Luigi, 2013. "Monetary Shocks with Observation and Menu Costs," CEPR Discussion Papers 9488, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9488
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    2. Fernando Alvarez & Francesco Lippi, 2014. "Price Setting With Menu Cost for Multiproduct Firms," Econometrica, Econometric Society, vol. 82(1), pages 89-135, January.

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    More about this item

    Keywords

    Impulse responses; Inattentiveness; Monetary shocks; Sticky prices;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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