DP12638 Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks
|Author(s):||Fernando Alvarez, Francesco Lippi|
|Publication Date:||January 2018|
|Keyword(s):||menu cost models, price flexibility, price plans, reference prices, sticky prices, temporary price changes|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12638|
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.