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Monetary Shocks with Observation and menu Costs

Author

Listed:
  • Fernando Alvarez

    (University of Chicago and NBER)

  • Francesco Lippi

    (University of Sassari and EIEF)

  • Luigi Paciello

    (EIEF)

Abstract

We compute the impulse response of output to an aggregate monetary shock in a general equilibrium when firms set prices subject to a costly observation of the state and a menu cost. We study how the aggregate effects of a monetary shock depend on the relative size of these costs. We find that empirically reasonable observations costs increase the impact and the persistence of the output response to monetary shocks compared to models with menu cost only, flattening the shape of the impulse response function. Moreover we show that if the shocks are not large the results are independent of the assumption of whether firms know the realization of the monetary shock on impact.

Suggested Citation

  • Fernando Alvarez & Francesco Lippi & Luigi Paciello, 2013. "Monetary Shocks with Observation and menu Costs," EIEF Working Papers Series 1310, Einaudi Institute for Economics and Finance (EIEF), revised May 2013.
  • Handle: RePEc:eie:wpaper:1310
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    References listed on IDEAS

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    Cited by:

    1. Fernando Alvarez & Francesco Lippi, 2014. "Price Setting With Menu Cost for Multiproduct Firms," Econometrica, Econometric Society, vol. 82(1), pages 89-135, January.

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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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