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Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models

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  • Felipe Schwartzman

    (FRB - Richmond)

  • Carlos Carvalho

    (Pontificia Universidade Catolica do Rio de Janeiro (PUC-Rio))

Abstract

Given the frequency of price changes, the real effect of a monetary shock is smaller if adjusting firms are the ones with older and, hence, more misaligned prices. This selection effect is important in a large class of sticky-price models with time-dependent price adjustment. We characterize conditions on the distribution of price durations associated with impact of monetary shocks: 1) Adjusting prices are older and real effects are smaller if the hazard function is more strongly increasing. 2) Adjusting prices are younger and real effects are larger if there is heterogeneity in price setting. 3) Adjusting prices are older and real effects are smaller if the durations of price spells is less variable. 4) The real effect of a shock to the growth rate of nominal income increases in the skewness of price spells. 5) Quantitative exercises show that it is enough to match the first two moments of the distribution of durations to get accurate real effects of monetary shocks. 6) The results in this paper generalize to the "sticky-information" setting proposed by Mankiw and Reis (2002).

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 987.

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Date of creation: 2012
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Handle: RePEc:red:sed012:987

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  1. Mankiw, N. Gregory & Reis, Ricardo, 2002. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Scholarly Articles 3415324, Harvard University Department of Economics.
  2. Xavier Gabaix & David Laibson, 2002. "The 6D Bias and the Equity-Premium Puzzle," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 257-330 National Bureau of Economic Research, Inc.
  3. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  4. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  5. Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2009. "Sluggish Responses of Prices and Inflation to Monetary Shocks in an Inventory Model of Money Demand," The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 911-967, August.
  6. Yi-Li Chien & Harold L. Cole & Hanno Lustig, 2009. "Is the Volatility of the Market Price of Risk due to Intermittent Portfolio Re-balancing?," NBER Working Papers 15382, National Bureau of Economic Research, Inc.
  7. Lynch, Anthony W, 1996. " Decision Frequency and Synchronization across Agents: Implications for Aggregate Consumption and Equity Return," Journal of Finance, American Finance Association, vol. 51(4), pages 1479-97, September.
  8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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Cited by:
  1. Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2014. "Small and Large Price Changes and the Propagation of Monetary Shocks," NBER Working Papers 20155, National Bureau of Economic Research, Inc.
  2. Alvarez, Fernando E & Lippi, Francesco & Paciello, Luigi, 2012. "Monetary Shocks in a Model with Inattentive Producers," CEPR Discussion Papers 9228, C.E.P.R. Discussion Papers.

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