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Reviving Micro Real Rigidities: The Importance of Demand Shocks

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  • S. Borau{g}an Aruoba
  • Eugene Oue
  • Felipe Saffie
  • Jonathan L. Willis

Abstract

We revisit micro real rigidities as a source of monetary non-neutrality in a menu-cost model with variable markups, using firm-level evidence to pin down key primitives. We embed a non-CES demand system in a quantitative monetary model and use firm-dynamics evidence to identify demand curvature and firm-level productivity and demand processes. The calibrated model matches untargeted micro pricing moments, the markup distribution, and cost pass-through, while generating comparable non-neutrality. The key innovation is an empirically supported placement of idiosyncratic demand shocks that shifts residual demand, thereby moving desired markups and prices under non-CES demand. The broader implication is that this calibrated model provides a portable framework linking monetary economics with trade and IO evidence.

Suggested Citation

  • S. Borau{g}an Aruoba & Eugene Oue & Felipe Saffie & Jonathan L. Willis, 2026. "Reviving Micro Real Rigidities: The Importance of Demand Shocks," Papers 2608.02817, arXiv.org.
    • Handle: RePEc:arx:papers:2608.02817
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