Discussion paper

DP9228 Monetary Shocks in a Model with Inattentive Producers

We study a model in which prices respond slowly to shocks because firms must pay a fixed cost to observe the determinants of the profit maximizing price, as pioneered by Caballero (1989) and Reis (2006). We extend their analysis to the case of random tran- sitory variation in the firm?s observation cost and characterize the mapping from the distribution of observation cost to the distribution of the times between consecutive re- views/price adjustments of a firm. We aggregate a continuum of firms and characterize analytically the cross-sectional distribution of the duration of reviews/prices. We establish the dependence of the real effect of a monetary shock on the distribution of price durations and hence on the distribution of observation costs and discuss applications.

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Citation

Alvarez, F, F Lippi and L Paciello (2012), ‘DP9228 Monetary Shocks in a Model with Inattentive Producers‘, CEPR Discussion Paper No. 9228. CEPR Press, Paris & London. https://cepr.org/publications/dp9228