Temporary Price Changes and the Real Effects of Monetary Policy

Patrick J. Kehoe () and Virgiliu Midrigan

No 14392, NBER Working Papers from National Bureau of Economic Research, Inc

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 benchmark menu cost model. Following either suggestion will improve monetary policy analysis.

JEL-codes: E12 E5 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2008-10
Note: EFG
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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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