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Monetary Shocks in a Model with Inattentive Producers

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  • Fernando Alvarez

    (University of Chicago and NBER)

  • Francesco Lippi

    (University of Sassari and EIEF)

  • Luigi Paciello

    (EIEF)

Abstract

We study a model in which prices respond slowly to shocks because firms must pay a fixed cost to observe the determinants of the profit maximizing price, as pioneered by Caballero (1989) and Reis (2006). We extend their analysis to the case of random transitory variation in the firm’s observation cost and characterize the mapping from the distribution of observation cost to the distribution of the times between consecutive reviews/ price adjustments of a firm. We aggregate a continuum of firms and characterize analytically the cross-sectional distribution of the duration of reviews/prices. We establish the dependence of the real effect of a monetary shock on the distribution of price durations and hence on the distribution of observation costs and discuss applications.

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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1208.

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Length: 53 pages
Date of creation: Aug 2012
Date of revision: Nov 2012
Handle: RePEc:eie:wpaper:1208

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  1. Alvarez, Fernando E & Lippi, Francesco & Paciello, Luigi, 2010. "Optimal price setting with observation and menu costs," CEPR Discussion Papers 7861, C.E.P.R. Discussion Papers.
  2. Ricardo Reis, 2005. "Inattentive Producers," NBER Working Papers 11820, National Bureau of Economic Research, Inc.
  3. Felipe Schwartzman & Carlos Carvalho, 2012. "Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models," 2012 Meeting Papers 987, Society for Economic Dynamics.
  4. Marco Bonomo & Carlos Carvalho & René Garcia, 2010. "State-dependent pricing under infrequent information: a unified framework," Staff Reports 455, Federal Reserve Bank of New York.
  5. Bonomo, Marco & Carvalho, Carlos, 2004. "Endogenous Time-Dependent Rules and Inflation Inertia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1015-41, December.
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