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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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  1. Michael B. Devereux & James Yetman, 2001. "Predetermined Prices and the Persistent Effects of Money on Output," Staff Working Papers 01-13, Bank of Canada.
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  4. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
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  12. Lee E. Ohanian & Alan C. Stockman & Lutz Kilian, 1994. "The effects of real and monetary shocks in a business cycle model with some sticky prices," Proceedings, Federal Reserve Bank of Cleveland, pages 1209-1240.
  13. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  14. Haltiwanger, John & Waldman, Michael, 1991. "Responders versus Non-responders: A New Perspective on Heterogeneity," Economic Journal, Royal Economic Society, vol. 101(408), pages 1085-1102, September.
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  19. 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.
  20. 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," Working Papers w200506, Banco de Portugal, Economics and Research Department.
  21. 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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  25. 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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  27. 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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  30. repec:oup:restud:v:60:y:1993:i:1:p:95-119 is not listed on IDEAS
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