Monetary Shocks with Observation and Menu Costs

62 Pages Posted: 30 May 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: May 2013

Abstract

We compute the impulse response of output to an aggregate monetary shock in a general equilibrium when firms set prices subject to a costly observation of the state and a menu cost. We study how the aggregate effects of a monetary shock depend on the relative size of these costs. We find that empirically reasonable observations costs increase the impact and the persistence of the output response to monetary shocks compared to models with menu cost only, flattening the shape of the impulse response function. Moreover we show that if the shocks are not large the results are independent of the assumption of whether firms know the realization of the monetary shock on impact.

Keywords: impulse responses, inattentiveness, monetary shocks, sticky prices

JEL Classification: E5

Suggested Citation

Alvarez, Fernando and Lippi, Francesco and Paciello, Luigi, Monetary Shocks with Observation and Menu Costs (May 2013). CEPR Discussion Paper No. DP9488. Available at SSRN: https://ssrn.com/abstract=2271939

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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