Citation

Discussion Paper Details

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Title: Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks

Author(s): Fernando Alvarez and Francesco Lippi

Publication Date: January 2018

Keyword(s): menu cost models, price flexibility, price plans, reference prices, sticky prices and temporary price changes

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We analyze a sticky price model where firms choose a price plan, namely a set of two prices. Changing the plan entails a "menu cost", but either price in the plan can be charged at any point in time. We analytically solve for the optimal policy and for the output response to a monetary shock. The setup rationalizes the coexistence of many price changes, most of which are temporary, with a modest flexibility of the aggregate price level. We present evidence consistent with the model implications using CPI data for Argentina across a wide range of inflation rates.

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Bibliographic Reference

Alvarez, F and Lippi, F. 2018. 'Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12638