Reviving Micro Real Rigidities: The Importance of Demand Shocks

S. Boragan Aruoba, Eugene Oue, Felipe Saffie and Jonathan Willis

No 32518, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We revisit micro real rigidities as a source of monetary non-neutrality in a menu-cost model with variable markups, using firm-level evidence to pin down key primitives. We embed a non-CES demand system in a quantitative monetary model and use firm-dynamics evidence to identify demand curvature and firm-level productivity and demand processes. The calibrated model matches untargeted micro pricing moments, the markup distribution, and cost pass-through, while generating comparable non-neutrality. The key innovation is an empirically supported placement of idiosyncratic demand shocks that shifts residual demand, thereby moving desired markups and prices under non-CES demand. The broader implication is that this calibrated model provides a portable framework linking monetary economics with trade and IO evidence.

JEL-codes: E30 E52 L11 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-bec and nep-mon
Note: ME
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