Price plans and the real effects of monetary policy

Fernando Alvarez and Francesco Lippi
Additional contact information
Fernando Alvarez: University of Chicago

No 549, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Transitory price changes are prominent in the data but do not fit neatly in standard sticky price models. We present a model where a firm chooses a “price plan†, namely a set of 2 prices each of which can be freely posted at each moment. While price changes between prices within the plan are free, the plan can be changed only subject to a fixed menu cost. This setup generates a persistent “reference†price level and short lived deviations from it, as in many datasets and a decreasing hazard function for price changes. We analytically solve for the optimal policy and for the cumulative impulse response function of output to a monetary shock. We compare the economy with the 2-price plan to a menu-cost economy (i.e. a plan with 1 price) featuring the same number of persistent price changes. We show that, for a small monetary shock, the introduction of a plan with 2 prices yields a cumulative output response that is 1/3 of the one produced by the menu cost economy. The smaller real effect is due to the flexibility delivered by the temporary price changes that are used by firms to respond to the shock.

Date: 2016
New Economics Papers: this item is included in nep-dge and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2016/paper_549.pdf (application/pdf)

Related works:
Working Paper: Price plans and the real effects of monetary policy (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:549

Access Statistics for this paper

More papers in 2016 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().