Inflation and Real Activity with Firm Level Productivity Shocks

Abstract

In the last fifteen years there has been an explosion of empirical work examining price setting behavior at the micro level.The work has in turn challenged existing macro models that attempt to explain monetary nonneutrality, because these models are generally at odds with much of the micro price data.A second generation of models, with fixed costs of price adjustment and idiosyncratic shocks, is more consistent with this micro data.Nonetheless, ambiguity remains about the extent of nonneutrality that can be attributed to costly price adjustment.Using a model that matches many features of the micro data, our paper takes a step toward eliminating that ambiguity, at the same time highlighting the challenges that remain.

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