Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy

Ricardo J. Caballero · Eduardo M. R. A. Engel

96 citations0/0 files storedThe Review of Economic Studies

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Economic theories and models Monetary Policy and Economic Impact Economic Theory and Policy

Abstract

When firms face menu costs, the relation between their output and money is highly non-linear. At the aggregate level, however, this needs not be so. In this paper we study the dynamic behaviour of a menu-cost economy where firms are heterogeneous in the shocks they perceive, and the demands and adjustment costs they face. In this context we (i) generalize the Caplin and Spulber (1987) steady-state monetary-neutrality result; (ii) show that uniqueness of equilibria depends not only on the degree of strategic complementarities but also on the degree of dispersion of firms' positions in their price-cycle; (iii) characterize the path of output outside the steady state and show that as strategic complementarities become more important, expansions become longer and smoother than contractions; and (iv) show that the potential impact of monetary shocks is an increasing function of the distance of the economy from its steady state, but that an uninformed policy maker will have no effect on output on average.

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References

1988Coordinating Coordination Failures in Keynesian Models 1987Monopolistic Competition and the Effects of Aggregate Demand 1985Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly 1977Inflation and Costs of Price Adjustment 1987Menu Costs and the Neutrality of Money 1972A Theory of Monopolistic Price Adjustment 2016Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria 1983Optimum Pricing Policy under Stochastic Inflation

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