Reviving Micro Real Rigidities: The Importance of Demand Shocks

S. Boragan Aruoba, Eugene Oue, Felipe Saffie and Jonathan Willis

No 32518, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We revisit the role of micro real rigidities as a driver of monetary non-neutrality, using a simple menu-cost model featuring non-constant elasticity of demand with both idiosyncratic productivity and demand shocks. The model is calibrated to match firm-level productivity and demand processes estimated from U.S. data. Despite its simplicity, the calibrated model overturns prior negative findings in the literature on micro real rigidities and generates sizeable monetary non-neutrality comparable to alternative frameworks. Additionally, the model reproduces untargeted pricing dynamics and a markup distribution consistent with U.S. microdata. As a result, this framework effortlessly unifies pricing, markup behavior, and firm dynamics. The key to reconciling firm-level and pricing dynamics lies in the interaction between non-constant demand elasticity and idiosyncratic demand shocks.

JEL-codes: E30 E52 L11 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-bec and nep-mon
Note: ME
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