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Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks

Fernando Alvarez and Francesco Lippi
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Fernando Alvarez: University of Chicago

No 1801, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: 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.

New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2018, Revised 2018-01
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