Small and Large Price Changes and the Propagation of Monetary Shocks

75 Pages Posted: 2 Dec 2013

See all articles by Fernando Alvarez

Fernando Alvarez

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

Hervé le Bihan

Banque de France - Centre de Recherche

Francesco Lippi

University of Sassari

Multiple version iconThere are 3 versions of this paper

Date Written: December 2013

Abstract

We document the presence of both small and large price changes in individual price records from the CPI in France and the US. After correcting for measurement error and cross-section heterogeneity we find that the size distribution of price changes has a positive excess kurtosis, with a shape that lies between a Normal and a Laplace distribution. We propose a model, featuring random menu-costs and multi product firms, that is capable to reproduce the observed empirical patterns. We characterize analytically the response of the aggregate economy to a monetary shock. Different propagation mechanism, spanning the models of Taylor (1980), Calvo (1983) and Golosov and Lucas (2007), are nested under different combination of 4 fundamental parameters. We discuss the identification of these parameters using data on the size-distribution of price changes and the actual cost of price adjustments borne by firms. The output effect is proportional to the ratio of kurtosis to the frequency of price changes.

Keywords: Calvo pricing rule, distribution of price changes, menu cost, micro evidence, monetary shocks, rice setting

JEL Classification: E3, E5

Suggested Citation

Alvarez, Fernando and Le Bihan, Herve and Lippi, Francesco, Small and Large Price Changes and the Propagation of Monetary Shocks (December 2013). CEPR Discussion Paper No. DP9770. Available at SSRN: https://ssrn.com/abstract=2362319

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

Herve Le Bihan

Banque de France - Centre de Recherche ( email )

31 rue Croix des Petits Champs
Room 41-1391
75049 Paris Cedex 01
France

Francesco Lippi

University of Sassari ( email )

Piazza Universita
Sassari, 07100
Italy

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