Temporary price changes and the real effects of monetary policy
Patrick Kehoe () and
Virgiliu Midrigan ()
No 413, Working Papers from Federal Reserve Bank of Minneapolis
In the data, prices change both temporarily and permanently. Standard Calvo models focus on permanent price changes and take one of two shortcuts when confronted with the data: drop temporary changes from the data or leave them in and treat them as permanent. We provide a menu cost model that includes motives for both types of price changes. Since this model accounts for the main regularities of price changes, its predictions for the real effects of monetary policy shocks are useful benchmarks against which to judge existing shortcuts. We find that neither shortcut comes close to these benchmarks. For monetary policy analysis, researchers should use a menu cost model like ours or at least a third, theory-based shortcut: set the Calvo model's parameters so that it generates the same real effects from monetary shocks as does the bench-mark menu cost model. Following either suggestion will improve monetary policy analysis.
Keywords: Keynesian economics; Prices (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26) Track citations by RSS feed
Downloads: (external link)
Working Paper: Temporary price changes and the real effects of monetary policy (2008)
Working Paper: Temporary Price Changes and the Real Effects of Monetary Policy (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:413
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Jannelle Ruswick ().