Small and Large Price Changes and the Propagation of Monetary Shocks

104 Pages Posted: 20 Jun 2014

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: June 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.

Keywords: price setting, micro evidence, size-distribution of price changes, kurtosis of price changes, menu-cost, Calvo pricing rule, output response to monetary shocks

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 (June 2014). Available at SSRN: https://ssrn.com/abstract=2456659 or http://dx.doi.org/10.2139/ssrn.2456659

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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