Reportgreen2014

Small and Large Price Changes and the Propagation of Monetary Shocks

Fernando E. Alvarez · Hervé Le Bihan · Francesco Lippi

36 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Economics of Agriculture and Food Markets Economic theories and models

Abstract

We document the presence of both small and large price changes in individual price records from the CPI in France and the US.After correcting for measurement error and cross-section heterogeneity, the size-distribution of price changes has a positive excess kurtosis.We propose an analytical menu cost model that encompasses several classic models, as Taylor (1980), Calvo (1983), Reis (2006), Golosov and Lucas (2007) and accounts for observed cross-sectional patterns.We show that the ratio of kurtosis to the frequency of price changes is a sufficient statistics for the real effects of monetary policy in a large class of models.

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References

1983Staggered prices in a utility-maximizing framework 1996Staggered Prices in a Utility-Maximizing Framework 1980Aggregate Dynamics and Staggered Contracts 2002Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve 2012New Trade Models, Same Old Gains?2008Five Facts about Prices: A Reevaluation of Menu Cost Models *2007Menu Costs and Phillips Curves 1999State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output

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