Monetary Shocks in Models with Inattentive Producers
We study models where prices respond slowly to shocks because firms are rationally inattentive. Producers must pay a cost to observe the determinants of the current profit maximizing price, and hence observe them infrequently. To generate large real effects of monetary shocks in such a model the time between observations must be long and/or highly volatile. Previous work on rational inattentiveness has allowed for observation intervals which are either constant-but-long (e.g. Caballero (1989) or Reis (2006)) or volatile-but-short (e.g. Reis’s (2006) example where observation costs are negligible), but not both. In these models, the real effects of monetary policy are small for realistic values of the average time between observations. We show that non- negligible observation costs produce both these effects: intervals between observations are both infrequent and volatile. This generates large real effects of monetary policy for realistic values of the average time between observations.
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|Date of creation:||Dec 2014|
|Publication status:||published as Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2016. "Monetary Shocks in Models with Inattentive Producers," The Review of Economic Studies, vol 83(2), pages 421-459.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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- N. Gregory Mankiw & Ricardo Reis, 2002.
"Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve,"
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- Carvalho, Carlos & Schwartzman, Felipe, 2015. "Selection and monetary non-neutrality in time-dependent pricing models," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 141-156.
- Carlos Carvalho & Felipe Schwartzman, 2012. "Selection and monetary non-neutrality in time-dependent pricing models," Working Paper 12-09, Federal Reserve Bank of Richmond.
- Carlos Viana de Carvalho & Felipe Schwartzman, 2014. "Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models," Textos para discussão 627, Department of Economics PUC-Rio (Brazil).
- Felipe Schwartzman & Carlos Carvalho, 2012. "Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models," 2012 Meeting Papers 987, Society for Economic Dynamics.
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