Distributional Dynamics Under Smoothly State-Dependent Pricing

52 Pages Posted: 17 Nov 2011

See all articles by James S. Costain

James S. Costain

Banco de España - Research Department

Anton Nakov

European Central Bank (ECB); CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: November 9, 2011

Abstract

Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into "intensive", "extensive", and "selection" margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to sector-specific shocks is gradual, but inappropriate econometrics might make it appear immediate.

Keywords: Nominal rigidity, state-dependent pricing, menu costs, heterogeneity, Taylor rule

JEL Classification: E31, E52, D81

Suggested Citation

Costain, James S. and Nakov, Anton A., Distributional Dynamics Under Smoothly State-Dependent Pricing (November 9, 2011). FEDS Working Paper No. 2011-50, Available at SSRN: https://ssrn.com/abstract=1960201 or http://dx.doi.org/10.2139/ssrn.1960201

James S. Costain (Contact Author)

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

Anton A. Nakov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

CEPR ( email )

London
United Kingdom

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