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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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  25. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
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  29. 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.
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