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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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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
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  1. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  2. Laurence Ball & David Romer, 1987. "The Equilibrium and Optimal Timing of Price Changes," NBER Working Papers 2412, National Bureau of Economic Research, Inc.
  3. Coenen, Günter & Levin, Andrew T., 2004. "Identifying the influences of nominal and real rigidities in aggregate price-setting behavior," Working Paper Series 0418, European Central Bank.
  4. Devereux, Michael B & Yetman, James, 2003. " Predetermined Prices and the Persistent Effects of Money on Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 729-41, October.
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  7. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  8. Imbs, Jean & Mumtaz, Haroon & Ravn, Morten O & Rey, Hélène, 2003. "PPP Strikes Back: Aggregation and the Real Exchange Rate," CEPR Discussion Papers 3715, C.E.P.R. Discussion Papers.
  9. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  10. 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.
  11. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1991. "Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy," NBER Working Papers 3729, National Bureau of Economic Research, Inc.
  12. Ohanian, Lee E & Stockman, Alan C & Kilian, Lutz, 1995. "The Effects of Real and Monetary Shocks in a Business Cycle Model with Some Sticky Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1209-34, November.
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  16. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
  17. 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.
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  19. repec:nbr:nberre:0126 is not listed on IDEAS
  20. Eyal Baharad & Benjamin Eden, 2004. "Price Rigidity and Price Dispersion: Evidence from Micro Data," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 613-641, July.
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  23. Esteban Jadresic, 1999. "Sticky Prices: An Empirical Assessment of Alternative Models," IMF Working Papers 99/72, International Monetary Fund.
  24. Robert Barsky & Christopher House & Miles Kimball, 2003. "Do Flexible Durable Goods Prices Undermine Sticky Price Models?," Macroeconomics 0302003, EconWPA.
  25. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
  26. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  27. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
  28. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  29. 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.
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