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

Francesco Lippi and Fernando Alvarez

No 12638, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Sticky prices; Menu cost models; Temporary price changes; Reference prices; Price plans; Price flexibility (search for similar items in EconPapers)
JEL-codes: E3 E5 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Temporary Price Changes, Inflation Regimes, and the Propagation of Monetary Shocks (2020)
Working Paper: Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks (2018)
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