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Heterogeneity in Price Setting and the Real Effects of Monetary Shocks

  • Carlos 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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File URL: http://econwpa.repec.org/eps/mac/papers/0509/0509017.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0509017.

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Date of creation: 10 Sep 2005
Date of revision: 12 Sep 2005
Handle: RePEc:wpa:wuwpma:0509017
Note: Type of Document - pdf
Contact details of provider: Web page: http://econwpa.repec.org

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  9. Emmanuel Dhyne & Luis J. Álvarez & Hervé le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lünnemann & Fabio Rumler & Jouko Vilmunen, 2005. "Price setting in the euro area: Some stylized facts from Individual Consumer Price Data," Banco de Espa�a Working Papers 0528, Banco de Espa�a.
  10. Engin Kara & Huw Dixon, 2005. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Computing in Economics and Finance 2005 87, Society for Computational Economics.
  11. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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  16. Devereux, Michael B & Yetman, James, 2001. "Predetermined Prices and the Persistent Effects of Money on Output," CEPR Discussion Papers 2917, C.E.P.R. Discussion Papers.
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  23. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
  24. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  25. Andrzej Skrzypacz & Jerzy D. Konieczny, 2005. "Search, Costly Price Adjustment and the Frequency of Price Changes – Theory and Evidence," 2005 Meeting Papers 782, Society for Economic Dynamics.
  26. Mark Bils & Peter J. Klenow & Oleksiy Kryvtsov, 2003. "Sticky prices and monetary policy shocks," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-9.
  27. Robert Barsky & Christopher L. House & Miles Kimball, 2003. "Do Flexible Durable Goods Prices Undermine Sticky Price Models?," NBER Working Papers 9832, National Bureau of Economic Research, Inc.
  28. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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