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Distributional dynamics under smoothly state-dependent pricing

  • Costain, James
  • Nakov, Anton

Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into “intensive”, “extensive”, and “selection” margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to sector-specific shocks is gradual, but inappropriate econometrics might make it appear immediate.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 58 (2011)
Issue (Month): 6 ()
Pages: 646-665

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Handle: RePEc:eee:moneco:v:58:y:2011:i:6:p:646-665
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. James Costain & Anton Nakov, 2011. "Distributional dynamics under smoothly state-dependent pricing," Finance and Economics Discussion Series 2011-50, Board of Governors of the Federal Reserve System (U.S.).
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  17. Mirko Wiederholt & Emanuel Moench & Bartosz Maćkowiak, 2009. "Sectoral Price Data and Models of Price Setting," 2009 Meeting Papers 666, Society for Economic Dynamics.
  18. Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo, 2011. "Reference Prices, Costs, and Nominal Rigidities," American Economic Review, American Economic Association, vol. 101(1), pages 234-62, February.
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