Temporary price changes and the real effects of monetary policy

Patrick Kehoe and Virgiliu Midrigan

No 413, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: In the data, prices change both temporarily and permanently. Standard Calvo models focus on permanent price changes and take one of two shortcuts when confronted with the data: drop temporary changes from the data or leave them in and treat them as permanent. We provide a menu cost model that includes motives for both types of price changes. Since this model accounts for the main regularities of price changes, its predictions for the real effects of monetary policy shocks are useful benchmarks against which to judge existing shortcuts. We find that neither shortcut comes close to these benchmarks. For monetary policy analysis, researchers should use a menu cost model like ours or at least a third, theory-based shortcut: set the Calvo model's parameters so that it generates the same real effects from monetary shocks as does the bench-mark menu cost model. Following either suggestion will improve monetary policy analysis.

Keywords: Keynesian economics; Prices (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (33)

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Related works:
Working Paper: Temporary price changes and the real effects of monetary policy (2008)
Working Paper: Temporary Price Changes and the Real Effects of Monetary Policy (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:413

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