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Small and large price changes and the propagation of monetary shocks

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  • Alvarez, Fernando
  • Lippi, Francesco
  • ,

Abstract

We document the presence of both small and large price changes in individual price records from the CPI in France and the US. After correcting for measurement error and cross-section heterogeneity we find that the size distribution of price changes has a positive excess kurtosis, with a shape that lies between a Normal and a Laplace distribution. We propose a model, featuring random menu-costs and multi product firms, that is capable to reproduce the observed empirical patterns. We characterize analytically the response of the aggregate economy to a monetary shock. Different propagation mechanism, spanning the models of Taylor (1980), Calvo (1983) and Golosov and Lucas (2007), are nested under different combination of 4 fundamental parameters. We dis- cuss the identification of these parameters using data on the size-distribution of price changes and the actual cost of price adjustments borne by firms. The output effect is proportional to the ratio of kurtosis to the frequency of price changes.

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  • Alvarez, Fernando & Lippi, Francesco & ,, 2013. "Small and large price changes and the propagation of monetary shocks," CEPR Discussion Papers 9770, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9770
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    Cited by:

    1. Carvalho, Carlos & Schwartzman, Felipe, 2015. "Selection and monetary non-neutrality in time-dependent pricing models," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 141-156.
    2. Jacopo Magnani & Aspen Gorry & Ryan Oprea, 2016. "Time and State Dependence in an Ss Decision Experiment," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 285-310, January.
    3. Peter Karadi & Adam Reiff, 2019. "Menu Costs, Aggregate Fluctuations, and Large Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(3), pages 111-146, July.
    4. Berger, David & Vavra, Joseph, 2018. "Dynamics of the U.S. price distribution," European Economic Review, Elsevier, vol. 103(C), pages 60-82.
    5. Amlendu Dubey & Juhi Lohani, 2022. "Inflation targeting and price behaviour: evidence from India," Indian Economic Review, Springer, vol. 57(2), pages 265-284, December.
    6. Paulie, Charlotte, 2019. "Does Inflation Targeting Reduce the Dispersion of Price Setters’ Inflation Expectations?," Working Paper Series 370, Sveriges Riksbank (Central Bank of Sweden).
    7. Donayre, Luiggi & Panovska, Irina, 2016. "State-dependent exchange rate pass-through behavior," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 170-195.
    8. Isaac Baley & Andrés Blanco, 2016. "Menu Costs, Uncertainty Cycles, and the Propagation of Nominal Shocks," Working Papers 918, Barcelona School of Economics.
    9. Chen Yeh & David Argente, 2016. "A Menu Cost Model with Price Experimentation," 2016 Meeting Papers 1515, Society for Economic Dynamics.
    10. Roldan-Blanco, Pau & Gilbukh, Sonia, 2021. "Firm dynamics and pricing under customer capital accumulation," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 99-119.
    11. Fernando Alvarez & Francesco Lippi, 2016. "Price plans and the real effects of monetary policy," 2016 Meeting Papers 549, Society for Economic Dynamics.
    12. Peng Zhou & Huw Dixon, 2019. "The Determinants of Price Rigidity in the UK: Analysis of the CPI and PPI Microdata and Application to Macrodata Modelling," Manchester School, University of Manchester, vol. 87(5), pages 640-677, September.
    13. Paulie, Charlotte, 2019. "Does Inflation Targeting Reduce the Dispersion of Price Setters’ Inflation Expectations?," Working Paper Series 2018:16, Uppsala University, Department of Economics.
    14. William (Bill) Zame & Jean-Paul L'Huillier, 2015. "Optimally Sticky Prices," 2015 Meeting Papers 621, Society for Economic Dynamics.

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    More about this item

    Keywords

    Calvo pricing rule; Distribution of price changes; Menu cost; Micro evidence; Monetary shocks; Rice setting;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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