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Monetary Shocks with Observation and menu Costs

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

No 1310, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: We compute the impulse response of output to an aggregate monetary shock in a general equilibrium when firms set prices subject to a costly observation of the state and a menu cost. We study how the aggregate effects of a monetary shock depend on the relative size of these costs. We find that empirically reasonable observations costs increase the impact and the persistence of the output response to monetary shocks compared to models with menu cost only, flattening the shape of the impulse response function. Moreover we show that if the shocks are not large the results are independent of the assumption of whether firms know the realization of the monetary shock on impact.

New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Date: 2013, Revised 2013-05
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Working Paper: Monetary Shocks with Observation and Menu Costs (2013) Downloads
Working Paper: Monetary Shocks with Observation and Menu Costs (2012) Downloads
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