The Skewness of the Price Change Distribution: A New Touchstone for Sticky Price Models

Shaowen Luo and Daniel Villar Vallenas

No 2017-028, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We present a new way of empirically evaluating various sticky price models used to assess the degree of monetary non-neutrality. While menu cost models uniformly predict that price change skewness and dispersion fall with inflation, in the Calvo model both rise. However, CPI price data from the late 1970's onwards shows that skewness does not fall with inflation, while dispersion does. We develop a random menu cost model that, with a menu cost distribution that has a strong Calvo feature, can match the empirical patterns found. The model therefore exhibits much more monetary non-neutrality than existing menu cost models.

Keywords: Inflation; Monetary policy; Prices, business fluctuations, and cycles (search for similar items in EconPapers)
JEL-codes: E31 E32 E47 E52 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2017-03-10
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-28

DOI: 10.17016/FEDS.2017.028

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