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Monetary Shocks with Observation and menu Costs

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  • Fernando Alvarez

    (University of Chicago and NBER)

  • Francesco Lippi

    (University of Sassari and EIEF)

  • Luigi Paciello

    (EIEF)

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.

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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 1310.

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Length: 58 pages
Date of creation: 2013
Date of revision: May 2013
Handle: RePEc:eie:wpaper:1310

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  1. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2010. "Optimal price setting with observation and menu costs," NBER Working Papers 15852, National Bureau of Economic Research, Inc.
  2. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1415-1464, November.
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  6. Álvarez, Luis J. & Dhyne, Emmanuel & Hoeberichts, Marco & Kwapil, Claudia & Le Bihan, Hervé & Lünnemann, Patrick & Martins, Fernando & Sabbatini, Roberto & Stahl, Harald & Vermeulen, Philip & Vilmu, 2006. "Sticky prices in the euro area: a summary of new micro evidence," Discussion Paper Series 1: Economic Studies, Deutsche Bundesbank, Research Centre 2006,02, Deutsche Bundesbank, Research Centre.
  7. Levy, Daniel, et al, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 791-825, August.
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  14. Marco Bonomo & Carlos Carvalho & René Garcia, 2010. "State-dependent pricing under infrequent information: a unified framework," Staff Reports, Federal Reserve Bank of New York 455, Federal Reserve Bank of New York.
  15. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
  16. Leif Danziger, 1998. "A Dynamic Economy with Costly Price Adjustment," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 83, CREFE, Université du Québec à Montréal.
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Cited by:
  1. Fernando E. Alvarez & Francesco Lippi, 2012. "Price Setting with menu cost for Multi-product firms," NBER Working Papers 17923, National Bureau of Economic Research, Inc.

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