Monetary Shocks in Models with Inattentive Producers

Fernando Alvarez, Francesco Lippi and Luigi Paciello ()

No 20817, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study models where prices respond slowly to shocks because firms are rationally inattentive. Producers must pay a cost to observe the determinants of the current profit maximizing price, and hence observe them infrequently. To generate large real effects of monetary shocks in such a model the time between observations must be long and/or highly volatile. Previous work on rational inattentiveness has allowed for observation intervals which are either constant-but-long (e.g. Caballero (1989) or Reis (2006)) or volatile-but-short (e.g. Reis’s (2006) example where observation costs are negligible), but not both. In these models, the real effects of monetary policy are small for realistic values of the average time between observations. We show that non- negligible observation costs produce both these effects: intervals between observations are both infrequent and volatile. This generates large real effects of monetary policy for realistic values of the average time between observations.

JEL-codes: E12 E5 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-mac and nep-mon
Note: EFG ME
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Published as Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2016. "Monetary Shocks in Models with Inattentive Producers," The Review of Economic Studies, vol 83(2), pages 421-459.

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Related works:
Journal Article: Monetary Shocks in Models with Inattentive Producers (2016)
Working Paper: Monetary Shocks in Models with Inattentive Producers (2015)
Working Paper: Monetary Shocks in a Model with Inattentive Producers (2012)
Working Paper: Monetary Shocks in a Model with Inattentive Producers (2012)
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