Persistent Monetary Non-Neutrality in an Estimated Model with Menu Costs and Partially Costly Information
34 Pages Posted: 27 Mar 2016 Last revised: 8 Jul 2019
Date Written: July 1, 2019
We propose a price-setting model which helps reconcile microeconomic evidence of relatively frequent and large price changes with persistent real effects of monetary shocks. In our model, both price adjustments and the gathering of some types of information are costly, requiring the payment of a lump-sum cost. Additional relevant information flows continuously, and can be factored into pricing decisions costlessly. We estimate three versions of the model by a Simulated Method of Moments, including a special case in which all information is costly. When idiosyncratic information is free and aggregate information is costly, our estimated model is able to match individual price-setting statistics for the U.S. and, at the same time, produce persistent monetary non-neutrality.
Keywords: menu costs, information costs, infrequent information, partial information, inattentiveness, optimal price setting, state-dependent pricing, time-dependent pricing
JEL Classification: E00, E31
Suggested Citation: Suggested Citation