Small and Large Price Changes and the Propagation of Monetary Shocks

49 Pages Posted: 26 May 2014 Last revised: 29 Jul 2022

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

Università degli Studi di Sassari; Einaudi Institute for Economics and Finance (EIEF)

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Date Written: May 2014

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, the size-distribution of price changes has a positive excess kurtosis. We propose an analytical menu cost model that encompasses several classic models, as Taylor (1980), Calvo (1983), Reis (2006), Golosov and Lucas (2007) and accounts for observed cross-sectional patterns. We show that the ratio of kurtosis to the frequency of price changes is a sufficient statistics for the real effects of monetary policy in a large class of models.

Suggested Citation

Alvarez, Fernando and Le Bihan, Herve and Lippi, Francesco, Small and Large Price Changes and the Propagation of Monetary Shocks (May 2014). NBER Working Paper No. w20155, Available at SSRN: https://ssrn.com/abstract=2441806

Fernando Alvarez (Contact Author)

University of Chicago - Department of Economics ( email )

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Herve Le Bihan

Banque de France - Centre de Recherche ( email )

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Francesco Lippi

Università degli Studi di Sassari ( email )

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

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Rome, 00187
Italy

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