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Monetary Shocks in a Model with Inattentive Producers

  • Alvarez, Fernando
  • Lippi, Francesco
  • Paciello, Luigi

We study a model in which prices respond slowly to shocks because firms must pay a fixed cost to observe the determinants of the profit maximizing price, as pioneered by Caballero (1989) and Reis (2006). We extend their analysis to the case of random tran- sitory variation in the firm’s observation cost and characterize the mapping from the distribution of observation cost to the distribution of the times between consecutive re- views/price adjustments of a firm. We aggregate a continuum of firms and characterize analytically the cross-sectional distribution of the duration of reviews/prices. We establish the dependence of the real effect of a monetary shock on the distribution of price durations and hence on the distribution of observation costs and discuss applications.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9228.

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Date of creation: Nov 2012
Date of revision:
Handle: RePEc:cpr:ceprdp:9228
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  1. Saroj Bhattarai & Raphael Schoenle, 2010. "Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices," Working Papers 15, Brandeis University, Department of Economics and International Businesss School.
  2. repec:nbr:nberre:0126 is not listed on IDEAS
  3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc.
  4. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
  5. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2011. "Optimal Price Setting With Observation and Menu Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 126(4), pages 1909-1960.
  6. Ricardo Reis, 2005. "Inattentive Producers," NBER Working Papers 11820, National Bureau of Economic Research, Inc.
  7. Alvarez, Fernando & Lippi, Francesco, 2012. "Price setting with menu cost for multi-product firms," CEPR Discussion Papers 8863, C.E.P.R. Discussion Papers.
  8. Carlos Carvalho & Felipe Schwartzman, 2012. "Selection and monetary non-neutrality in time-dependent pricing models," Working Paper 12-09, Federal Reserve Bank of Richmond.
  9. Marco Bonomo & Carlos Carvalho, 2004. "Endogenous Time-Dependent Rules and Inflation Inertia," Macroeconomics 0402005, EconWPA, revised 19 May 2005.
  10. repec:tpr:qjecon:v:117:y:2002:i:4:p:1295-1328 is not listed on IDEAS
  11. repec:oup:qjecon:v:117:y:2002:i:4:p:1295-1328 is not listed on IDEAS
  12. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  13. Dixon, Huw & Kara, Engin, 2011. "Contract length heterogeneity and the persistence of monetary shocks in a dynamic generalized Taylor economy," European Economic Review, Elsevier, vol. 55(2), pages 280-292, February.
  14. Marco Bonomo & Carlos Carvalho & René Garcia, 2010. "State-dependent pricing under infrequent information: a unified framework," Staff Reports 455, Federal Reserve Bank of New York.
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