DP9770 Small and large price changes and the propagation of monetary shocks
|Author(s):||Fernando Alvarez, Hervé Le Bihan, Francesco Lippi|
|Publication Date:||December 2013|
|Keyword(s):||Calvo pricing rule, distribution of price changes, menu cost, micro evidence, monetary shocks, rice setting|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9770|
We document the presence of both small and large price changes in individual price records from the CPI in France and the US. After correcting for measurement error and cross-section heterogeneity we find that the size distribution of price changes has a positive excess kurtosis, with a shape that lies between a Normal and a Laplace distribution. We propose a model, featuring random menu-costs and multi product firms, that is capable to reproduce the observed empirical patterns. We characterize analytically the response of the aggregate economy to a monetary shock. Different propagation mechanism, spanning the models of Taylor (1980), Calvo (1983) and Golosov and Lucas (2007), are nested under different combination of 4 fundamental parameters. We dis- cuss the identification of these parameters using data on the size-distribution of price changes and the actual cost of price adjustments borne by firms. The output effect is proportional to the ratio of kurtosis to the frequency of price changes.