Monetary Shocks in Models with Inattentive Producers

57 Pages Posted: 5 Jan 2015 Last revised: 19 Nov 2022

See all articles by Fernando Alvarez

Fernando Alvarez

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

Francesco Lippi

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

Luigi Paciello

Einaudi Institute for Economics and Finance (EIEF)

Date Written: December 2014

Abstract

We study models where prices respond slowly to shocks because firms are rationally inattentive. Producers must pay a cost to observe the determinants of the current profit maximizing price, and hence observe them infrequently. To generate large real effects of monetary shocks in such a model the time between observations must be long and/or highly volatile. Previous work on rational inattentiveness has allowed for observation intervals which are either constant-but-long (e.g. Caballero (1989) or Reis (2006)) or volatile-but-short (e.g. Reis’s (2006) example where observation costs are negligible), but not both. In these models, the real effects of monetary policy are small for realistic values of the average time between observations. We show that non- negligible observation costs produce both these effects: intervals between observations are both infrequent and volatile. This generates large real effects of monetary policy for realistic values of the average time between observations.

Suggested Citation

Alvarez, Fernando and Lippi, Francesco and Paciello, Luigi, Monetary Shocks in Models with Inattentive Producers (December 2014). NBER Working Paper No. w20817, Available at SSRN: https://ssrn.com/abstract=2545215

Fernando Alvarez (Contact Author)

University of Chicago - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Francesco Lippi

Università degli Studi di Sassari ( email )

Piazza Universita
Sassari, 07100
Italy

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

Via Due Macelli, 73
Rome, 00187
Italy

Luigi Paciello

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

Via Due Macelli, 73
Rome, 00187
Italy

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