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The real effects of monetary shocks in sticky price models. A sufficient statistic approach

Author

Listed:
  • Fernando Alvarez

    (University of Chicago)

  • Hervé Le Bihan

    (Banque de France)

  • Francesco Lippi

    (EIEF and University of Sassari)

Abstract

We prove that the ratio of kurtosis to the frequency of price changes is a sufficient statistic for the real effects of monetary shocks, measured by the cumulated output response following the shock. The sufficient statistic result holds in a large class of models which includes Taylor (1980), Calvo (1983), Reis (2006), Golosov and Lucas (2007), Nakamura and Steinsson (2010), Midrigan (2011) and Alvarez and Lippi (2014). Several models in this class are able to account for the positive excess kurtosis of the size- distribution of price changes that appears in the data. We review empirical measures of kurtosis and frequency and conclude that a model that successfully matches the micro evidence on kurtosis and frequency produces real effects that are about 4 times larger than in the Golosov-Lucas model, and about 30% below those of the Calvo model. We discuss the robustness of our results to changes in the setup, including small in ation and leptokurtic cost shocks.

Suggested Citation

  • Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2016. "The real effects of monetary shocks in sticky price models. A sufficient statistic approach," EIEF Working Papers Series 1608, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2016.
    • Handle: RePEc:eie:wpaper:1608
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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