Sectoral Interactions and Monetary Policy Under Costly Price Adjustments

Kevin Huang () and Jonathan Willis

No 883, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: This paper presents a state-dependent pricing model with a two-stage chain-of-production structure and serially correlated, idiosyncratic price adjustment cost process in each sector. The model can explain much of the observed volatility and persistence of inflation and output, and nonlinearity and asymmetry in the responses of prices and quantities to monetary shocks. We derive analytical solutions in a static version of the model to illustrate the main results and to gain insights. We solve the dynamic model using a modified nonlinear solution method that features indirect inference and self-validating inflation forecasts as key components.

Date: 2012
New Economics Papers: this item is included in nep-dge and nep-mon
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Journal Article: Sectoral Interactions and Monetary Policy under Costly Price Adjustments (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:883

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