Monetary Non-Neutrality in a Multi-Sector Menu Cost Model

Emi Nakamura and Jon Steinsson

No 14001, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Empirical evidence suggests that as much as 1/3 of the U.S. business cycle is due to nominal shocks. We calibrate a multi-sector menu cost model using new evidence on the cross-sectional distribution of the frequency and size of price changes in the U.S. economy. We augment the model to incorporate intermediate inputs. We show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non-neutrality generated by the model. We furthermore show that the introduction of intermediate inputs raises the degree of monetary non-neutrality by another factor of three, without adversely affecting the model's ability to match the large average size of price changes. Our multi-sector menu cost model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 23% of the U.S. business cycle.

JEL-codes: E30 (search for similar items in EconPapers)
Date: 2008-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (22)

Published as Emi Nakamura & Jón Steinsson, 2010. "Monetary Non-Neutrality in a Multisector Menu Cost Model," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 961-1013, August.

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Related works:
Journal Article: Monetary Non-neutrality in a Multisector Menu Cost Model (2010)
Working Paper: Monetary Non-Neutrality in a Multi-Sector Menu Cost Model (2007)
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