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Monetary Shocks in a Model with Inattentive Producers

  • Fernando Alvarez

    (University of Chicago and NBER)

  • Francesco Lippi

    (University of Sassari and EIEF)

  • Luigi Paciello


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 transitory 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 reviews/ 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 Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1208.

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Length: 53 pages
Date of creation: Aug 2012
Date of revision: Nov 2012
Handle: RePEc:eie:wpaper:1208
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  1. 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.
  2. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2010. "Optimal price setting with observation and menu costs," NBER Working Papers 15852, National Bureau of Economic Research, Inc.
  3. Saroj Bhattarai & Raphael Schoenle, 2011. "Multiproduct firms and price-setting: theory and evidence from U.S. producer prices," Globalization and Monetary Policy Institute Working Paper 73, Federal Reserve Bank of Dallas.
  4. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 793-821.
  5. 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.
  6. Carlos Carvalho & Felipe Schwartzman, 2012. "Selection and monetary non-neutrality in time-dependent pricing models," Working Paper 12-09, Federal Reserve Bank of Richmond.
  7. Fernando E. Alvarez & Francesco Lippi, 2012. "Price Setting with menu cost for Multi-product firms," NBER Working Papers 17923, National Bureau of Economic Research, Inc.
  8. 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.
  9. Marco Bonomo & Carlos Carvalho, 2004. "Endogenous Time-Dependent Rules and Inflation Inertia," Macroeconomics 0402005, EconWPA, revised 19 May 2005.
  10. 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.
  11. repec:nbr:nberre:0126 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.
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