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The Effects of Heterogeneity in Price Setting on Price and Inflation Inertia

  • Carlos Viana de Carvalho

    (Princeton University)

This paper analyzes the implications of heterogeneity in price setting for the real effects of monetary shocks. Starting from otherwise standard sticky price and sticky information models, I introduce ex-ante heterogeneity in terms of price setting frictions, and compare the resulting dynamics with those of identical firms economies under alternative calibrations. Both the qualitative and the quantitative results show that heterogeneity leads monetary shocks to have substantially larger and more persistent real effects. In particular, reproducing the dynamics of a truly heterogeneous economy with a model based on identical firms requires unrealistically large degrees of price setting frictions.

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Paper provided by EconWPA in its series Macroeconomics with number 0412013.

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Length: 32 pages
Date of creation: 25 Dec 2004
Date of revision: 29 Jan 2005
Handle: RePEc:wpa:wuwpma:0412013
Note: Type of Document - pdf; pages: 32
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