Inflation and Real Activity with Firm-Level Productivity Shocks
46 Pages Posted: 16 Sep 2013
Date Written: September 2013
In the last ten years there has been an explosion of empirical work examining price setting behavior at the micro level. The work has in turn challenged existing macro models that attempt to explain monetary nonneutrality, because these models are generally at odds with much of the micro price data. In response, economists have developed a second generation of sticky-price models that are state dependent and that include both fixed costs of price adjustment and idiosyncratic shocks. Nonetheless, some ambiguity remains about the extent of monetary nonneutrality that can be attributed to costly price adjustment. Our paper takes a step toward eliminating that ambiguity.
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