Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy

Ricardo Caballero () and Eduardo Engel

No 3729, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: When firms face menu costs, the relation between their output and money is highly nonlinear. At the aggregate level, however, this needs not be so. In this paper we study the dynamic behavior of a general equilibrium menu-cost economy where firms are heterogeneous in the shocks they perceive, and the demands and adjustment Costs they face. In this context we (i) generalize the Caplin and Spulber [1987] steady state monetary neutrality result; (ii) show that uniqueness of equilibria depends not only on the degree of strategic complementarities but also on the degree of dispersion of firms' positions in their price-cycle; (iii) characterize the path of output outside the steady state and show that as strategic complementarities become more important, expansions become longer and smoother than contractions; and (iv) show that the potential effectiveness of monetary policy is an increasing function of the distance of the economy from its steady state, but that an uninformed policy maker will have no effect on output on average.

Date: 1991-06
Note: EFG
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Citations: View citations in EconPapers (7)

Published as Review of Economic Studies, 60(1), January 1993, p. 95-120

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Journal Article: Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy (1993)
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