The Analytic Theory of a Monetary Shock
Fernando Alvarez and
Francesco Lippi
Econometrica, 2022, vol. 90, issue 4, 1655-1680
Abstract:
We propose an analytical method to analyze the propagation of an aggregate shock in a broad class of sticky‐price models. The method is based on the eigenvalue‐eigenfunction representation of the dynamics of the cross‐sectional distribution of firms' desired adjustments. A key novelty is that we can approximate the whole profile of the impulse response for any moment of interest in response to an aggregate shock (any displacement of the invariant distribution). We present several applications for an economy with low inflation and idiosyncratic shocks. We show that the shape of the impulse response of the canonical menu cost model is fully encoded by a single parameter, just like the Calvo model, although the shapes are very different. A model with a quadratic hazard function, arguably a good fit to the micro data on price setting, yields an impulse response that is close to the canonical menu cost model.
Date: 2022
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Citations: View citations in EconPapers (9)
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https://doi.org/10.3982/ECTA17348
Related works:
Working Paper: The Analytic Theory of a Monetary Shock (2021) 
Working Paper: The Analytic Theory of a Monetary Shock (2021) 
Working Paper: The Analytic Theory of a Monetary Shock (2019) 
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Persistent link: https://EconPapers.repec.org/RePEc:wly:emetrp:v:90:y:2022:i:4:p:1655-1680
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