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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 one-third of the U.S. business cycle is due to nominal shocks. We calibrate a multisector 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. A single-sector model with a frequency of price change equal to the median, rather than the mean, generates monetary non-neutrality similar to that in our multisector model. Our multisector 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. (c) 2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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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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