Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks
Fernando Alvarez and
No 12638, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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: menu cost models; price flexibility; price plans; reference prices; sticky prices; temporary price changes (search for similar items in EconPapers)
JEL-codes: E3 E5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Working Paper: Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks (2018)
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