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Monetary Shocks in a Model with Inattentive Producers

Fernando Alvarez, Francesco Lippi and Luigi Paciello ()
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Fernando Alvarez: University of Chicago and NBER

No 1208, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: We study a model in which prices respond slowly to shocks because firms must pay a fixed cost to observe the determinants of the profit maximizing price, as pioneered by Caballero (1989) and Reis (2006). We extend their analysis to the case of random transitory variation in the firm’s observation cost and characterize the mapping from the distribution of observation cost to the distribution of the times between consecutive reviews/ price adjustments of a firm. We aggregate a continuum of firms and characterize analytically the cross-sectional distribution of the duration of reviews/prices. We establish the dependence of the real effect of a monetary shock on the distribution of price durations and hence on the distribution of observation costs and discuss applications.

New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2012-08, Revised 2012-11
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