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Distributional dynamics under smoothly state-dependent pricing

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  • Costain, James
  • Nakov, Anton

Abstract

Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into “intensive”, “extensive”, and “selection” margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to firm-specific shocks is gradual, though inappropriate econometrics might make it appear immediate. JEL Classification: E31, E52, D81

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1333.

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Date of creation: Apr 2011
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Handle: RePEc:ecb:ecbwps:20111333

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Keywords: heterogeneity; menu costs; nominal rigidity; state-dependent pricing; Taylor rule;

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