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Monetary Non-Neutrality in a Multi-Sector Menu Cost Model

  • Jon Steinsson

    (Harvard University)

  • Emi Nakamura

    (Harvard University)

Empirical evidence suggests that as much as 1/3 of the U.S. business cycle is due to nominal shocks. We calibrate a multi-sector menu cost model using new evidence on the cross-sectional distribution of the frequency and size of price changes in the U.S. economy. We augment the model to incorporate intermediate inputs. We show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non-neutrality generated by the model. We furthermore show that the introduction of intermediate inputs raises the degree of monetary non-neutrality by another factor of three, without adversely affecting the model's ability to match the large average size of price changes. Our multi-sector menu cost model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 23% of the U.S. business cycle.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 736.

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Date of creation: 2007
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Handle: RePEc:red:sed007:736
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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