Monetary Shocks in a Model with Inattentive Producers

56 Pages Posted: 1 Feb 2013

See all articles by Fernando Alvarez

Fernando Alvarez

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Francesco Lippi

University of Sassari

Luigi Paciello

Einaudi Institute for Economics and Finance (EIEF)

Date Written: November 2012

Abstract

We study a model in which prices respond slowly to shocks because firms must pay a fixed cost to observe the determinants of the profit maximizing price, as pioneered by Caballero (1989) and Reis (2006). We extend their analysis to the case of random tran- sitory variation in the firm’s observation cost and characterize the mapping from the distribution of observation cost to the distribution of the times between consecutive re- views/price adjustments of a firm. We aggregate a continuum of firms and characterize analytically the cross-sectional distribution of the duration of reviews/prices. We establish the dependence of the real effect of a monetary shock on the distribution of price durations and hence on the distribution of observation costs and discuss applications.

Keywords: impulse responses., inattentiveness, monetary shocks, observation costs

JEL Classification: E5

Suggested Citation

Alvarez, Fernando and Lippi, Francesco and Paciello, Luigi, Monetary Shocks in a Model with Inattentive Producers (November 2012). CEPR Discussion Paper No. DP9228. Available at SSRN: https://ssrn.com/abstract=2210197

Fernando Alvarez (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Social Science Building, Room 442
Chicago, IL 60637
United States
773-702-4412 (Phone)
773-702-8490 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francesco Lippi

University of Sassari ( email )

Piazza Universita
Sassari, 07100
Italy

Luigi Paciello

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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