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Distributional dynamics under smoothly state-dependent pricing

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Listed:
  • Costain, James
  • Nakov, Anton

Abstract

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 firm-specific shocks is gradual, though inappropriate econometrics might make it appear immediate. JEL Classification: E31, E52, D81

Suggested Citation

  • Costain, James & Nakov, Anton, 2011. "Distributional dynamics under smoothly state-dependent pricing," Working Paper Series 1333, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20111333
    Note: 3308697
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    heterogeneity; menu costs; nominal rigidity; state-dependent pricing; Taylor rule;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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