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Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models

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  • Carlos Viana de Carvalho

    (Department of Economics PUC-Rio)

  • Felipe Schwartzman

    (Federal Reserve Bank of Richmond)

Abstract

For a given frequency of price changes, the real e ects of a monetary shock are smaller ifadjusting rms are disproportionately likely to have last set their prices before the shock. Thistype of selection for the age of prices provides a complete characterization of the nature ofpricing frictions in time-dependent sticky-price models. In particular: 1) The Taylor (1979)model exhibits maximal selection for older prices, whereas the Calvo (1983) model exhibitsno selection, so that real e ects are smaller in the former than in the latter; 2) Selection isweaker and real e ects of monetary shocks are larger if the hazard function of price adjustmentis less strongly increasing; 3) Selection is weaker and real e ects are larger if there is sectoralheterogeneity in price stickiness; 4) Selection is weaker and real e ects are larger if the durationsof price spells are more variable.

Suggested Citation

  • 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).
  • Handle: RePEc:rio:texdis:627
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    References listed on IDEAS

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    Cited by:

    1. Fernando Alvarez & Francesco Lippi & Juan Passadore, 2017. "Are State- and Time-Dependent Models Really Different?," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 379-457.
    2. Pasten, Ernesto & Schoenle, Raphael & Weber, Michael, 2020. "The propagation of monetary policy shocks in a heterogeneous production economy," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 1-22.
    3. Matthias Meier & Timo Reinelt, 2020. "Monetary Policy,Markup Dispersion, and Aggregate TFP," CRC TR 224 Discussion Paper Series crctr224_2020_161, University of Bonn and University of Mannheim, Germany.
    4. Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2016. "The Real Effects of Monetary Shocks in Sticky Price Models: A Sufficient Statistic Approach," American Economic Review, American Economic Association, vol. 106(10), pages 2817-2851, October.
    5. Isaac Baley & Andrés Blanco, 2019. "Aggregate dynamics in lumpy economies," Economics Working Papers 1670, Department of Economics and Business, Universitat Pompeu Fabra.
    6. Engin Kara, 2015. "The Selection Effect and the Inflation-Output Variability Trade-off," CESifo Working Paper Series 5664, CESifo.
    7. Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2013. "Small and Large Price Changes and the Propagation of Monetary Shocks," EIEF Working Papers Series 1318, Einaudi Institute for Economics and Finance (EIEF), revised Aug 2013.
    8. Kara, Engin, 2015. "The reset inflation puzzle and the heterogeneity in price stickiness," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 29-37.
    9. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2016. "Monetary Shocks in Models with Inattentive Producers," Review of Economic Studies, Oxford University Press, vol. 83(2), pages 421-459.
    10. Isaac Baley & J. Andrés Blanco, 2016. "Menu costs, uncertainty cycles, and the propagation of nominal shocks," Economics Working Papers 1532, Department of Economics and Business, Universitat Pompeu Fabra.
    11. Carvalho, Carlos Viana de, 2017. "Heterogeneous Sticky-Information Economies," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 37(2), November.
    12. Carvalho, Carlos & Nechio, Fernanda, 2018. "Approximating multisector New Keynesian models," Economics Letters, Elsevier, vol. 163(C), pages 193-196.
    13. Engin Kara & Ahmed Pirzada, 2021. "Evaluating effectiveness of price level targeting in the presence of increasing uncertainty," Bristol Economics Discussion Papers 21/737, School of Economics, University of Bristol, UK.
    14. Taylor, J.B., 2016. "The Staying Power of Staggered Wage and Price Setting Models in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2009-2042, Elsevier.
    15. Carlos Carvalho & Niels Arne Dam & Jae Won Lee, 2020. "The Cross-Sectional Distribution of Price Stickiness Implied by Aggregate Data," The Review of Economics and Statistics, MIT Press, vol. 102(1), pages 162-179, March.
    16. Peng Zhou & Huw Dixon, 2019. "The Determinants of Price Rigidity in the UK: Analysis of the CPI and PPI Microdata and Application to Macrodata Modelling," Manchester School, University of Manchester, vol. 87(5), pages 640-677, September.
    17. Fernando Alvarez & Francesco Lippi & Luigi Paciello, 2015. "Phillips curves with observation and menu costs," EIEF Working Papers Series 1508, Einaudi Institute for Economics and Finance (EIEF), revised Jul 2015.
    18. Carlos Carvalho & Oleksiy Kryvtsov, 2018. "Price Selection," Staff Working Papers 18-44, Bank of Canada.

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