Empirical evidence suggests that as much as 1/3 of the U.S. business cycle is due to nominal shocks. We calibrate a multi-sector menu cost model using new evidence on the cross-sectional distribution of the frequency and size of price changes in the U.S. economy. We augment the model to incorporate intermediate inputs. We show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non-neutrality generated by the model. We furthermore show that the introduction of intermediate inputs raises the degree of monetary non-neutrality by another factor of three, without adversely affecting the model's ability to match the large average size of price changes. Our multi-sector menu cost model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 23% of the U.S. business cycle.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
14001.
Length: Date of creation: May 2008 Date of revision: Handle: RePEc:nbr:nberwo:14001
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Find related papers by JEL classification: E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
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