IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/3729.html
   My bibliography  Save this paper

Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy

Author

Listed:
  • Ricardo J. Caballero
  • Eduardo M.R.A. Engel

Abstract

When firms face menu costs, the relation between their output and money is highly nonlinear. At the aggregate level, however, this needs not be so. In this paper we study the dynamic behavior of a general equilibrium menu-cost economy where firms are heterogeneous in the shocks they perceive, and the demands and adjustment Costs they face. In this context we (i) generalize the Caplin and Spulber [1987] steady state monetary neutrality result; (ii) show that uniqueness of equilibria depends not only on the degree of strategic complementarities but also on the degree of dispersion of firms' positions in their price-cycle; (iii) characterize the path of output outside the steady state and show that as strategic complementarities become more important, expansions become longer and smoother than contractions; and (iv) show that the potential effectiveness of monetary policy is an increasing function of the distance of the economy from its steady state, but that an uninformed policy maker will have no effect on output on average.

Suggested Citation

  • Ricardo J. Caballero & Eduardo M.R.A. Engel, 1991. "Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy," NBER Working Papers 3729, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3729
    Note: EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w3729.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
    2. Russell Cooper & Andrew John, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 441-463.
    3. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-666, September.
    4. Laurence Ball & David Romer, 1989. "The Equilibrium and Optimal Timing of Price Changes," Review of Economic Studies, Oxford University Press, vol. 56(2), pages 179-198.
    5. Robert J. Barro, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 39(1), pages 17-26.
    6. Andrew S. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 703-725.
    7. Benabou, Roland, 1989. "Optimal Price Dynamics and Speculation with a Storable Good," Econometrica, Econometric Society, vol. 57(1), pages 41-80, January.
    8. Caballero, Ricardo J & Engel, Eduardo M R A, 1991. "Dynamic (S, s) Economies," Econometrica, Econometric Society, vol. 59(6), pages 1659-1686, November.
    9. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-720, September.
    10. Eytan Sheshinski & Yoram Weiss, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 44(2), pages 287-303.
    11. Eytan Sheshinski & Yoram Weiss, 1983. "Optimum Pricing Policy under Stochastic Inflation," Review of Economic Studies, Oxford University Press, vol. 50(3), pages 513-529.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Simon Hall & Mark Walsh & Anthony Yates, 1997. "How do UK companies set prices?," Bank of England working papers 67, Bank of England.
    2. Carlos Borondo, 1994. "La rigidez nominal de los precios de la Nueva Economía Keynesiana: una panorámica," Investigaciones Economicas, Fundación SEPI, vol. 18(2), pages 245-288, May.
    3. Alexander L. Wolman, 2007. "The frequency and costs of individual price adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 531-552.
    4. Ricardo Reis, 2006. "Inattentive Producers," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 793-821.
    5. Patrick Artus, 1993. "Défauts de coordination des activités. Principes et exemples," Revue Économique, Programme National Persée, vol. 44(3), pages 551-568.
    6. Slade, Margaret E., 1999. "Sticky prices in a dynamic oligopoly: An investigation of (s,S) thresholds," International Journal of Industrial Organization, Elsevier, vol. 17(4), pages 477-511, May.
    7. Kevin X. D. Huang & Jonathan L. Willis, 2018. "Sectoral Interactions and Monetary Policy under Costly Price Adjustments," Annals of Economics and Finance, Society for AEF, vol. 19(2), pages 337-374, November.
    8. Dotsey, Michael & King, Robert G., 2005. "Implications of state-dependent pricing for dynamic macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 213-242, January.
    9. Claus Thustrup Kreiner, 2002. "Do the New Keynesian Microfoundations Rationalise Stabilisation Policy?," Economic Journal, Royal Economic Society, vol. 112(479), pages 384-401, April.
    10. Lucke, Bernd, 1995. "Do small menu costs explain large business cycles?," Economics Letters, Elsevier, vol. 47(2), pages 185-192, February.
    11. Marco Bonomo & Carlos Carvalho, 2010. "Imperfectly Credible Disinflation under Endogenous Time‐Dependent Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 799-831, August.
    12. Emi Nakamura & Jón Steinsson, 2010. "Monetary Non-neutrality in a Multisector Menu Cost Model," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 961-1013.
    13. Gaspar, Vítor & Levin, Andrew & Martins, Fernando Manuel & Smets, Frank, 2007. "Evidence from Surveys of Price-Setting Managers: Policy Lessons and Directions for Ongoing Research," CEPR Discussion Papers 6227, C.E.P.R. Discussion Papers.
    14. Fishman, Arthur, 1992. "Search Technology, Staggered Price-Setting, and Price Dispersion," American Economic Review, American Economic Association, vol. 82(1), pages 287-298, March.
    15. Mark J. Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 514-533, May.
    16. Choudhary, M. Ali & Faheem, Abdul & Hanif, M. Nadim & Naeem, Saima & Pasha, Farooq, 2016. "Price setting & price stickiness: A developing economy perspective," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 44-61.
    17. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
    18. Damjanovic, Vladislav & Nolan, Charles, 2012. "S,s pricing in a dynamic equilibrium model with heterogeneous sectors," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 550-567.
    19. Bonomo, Marco, 2000. "Are One-Sided S,s Rules Useful Proxies For Optimal Pricing Rules?," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 20(1), May.
    20. Leif Danziger, 1999. "A Dynamic Economy with Costly Price Adjustments," American Economic Review, American Economic Association, vol. 89(4), pages 878-901, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3729. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.