Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks

82 Pages Posted: 29 Jan 2018

See all articles by Fernando Alvarez

Fernando Alvarez

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

Francesco Lippi

University of Sassari

Date Written: January 2018

Abstract

We analyze a sticky price model where firms choose a price plan, namely a set of two prices. Changing the plan entails a "menu cost", but either price in the plan can be charged at any point in time. We analytically solve for the optimal policy and for the output response to a monetary shock. The setup rationalizes the coexistence of many price changes, most of which are temporary, with a modest flexibility of the aggregate price level. We present evidence consistent with the model implications using CPI data for Argentina across a wide range of inflation rates.

Keywords: menu cost models, price flexibility, price plans, reference prices, sticky prices, temporary price changes

JEL Classification: E3, E5

Suggested Citation

Alvarez, Fernando and Lippi, Francesco, Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks (January 2018). CEPR Discussion Paper No. DP12638. Available at SSRN: https://ssrn.com/abstract=3112262

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

Francesco Lippi

University of Sassari ( email )

Piazza Universita
Sassari, 07100
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
0
Abstract Views
87
PlumX Metrics