The Macroeconomics of Sticky Prices with Generalized Hazard Functions

49 Pages Posted: 7 Jul 2020

See all articles by Fernando Alvarez

Fernando Alvarez

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

Francesco Lippi

Einaudi Institute for Economics and Finance (EIEF); Luiss Guido Carli University

Aleksei Oskolkov

University of Chicago

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Date Written: June 30, 2020

Abstract

We give a thorough analytic characterization of a large class of sticky-price models where the firm’s price setting behavior is described by a generalized hazard function. Such a function provides a tractable description of the firm’s price setting behavior and allows for a vast variety of empirical hazards to be fitted. This setup is microfounded by random menu costs as in Caballero and Engel (1993) or, alternatively, by information frictions as in Woodford (2009). We establish two main results. First, we show how to identify all the primitives of the model, including the distribution of the fundamental adjustment costs and the implied generalized hazard function, using the distribution of price changes or the distribution of spell durations. Second, we derive a sufficient statistic for the aggregate effect of a monetary shock: given an arbitrary generalized hazard function, the cumulative impulse response to a once-and-for-all monetary shock is given by the ratio of the kurtosis of the steady-state distribution of price changes over the frequency of price adjustment times six. We prove that Calvo’s model yields the upper bound and Golosov and Lucas’ model the lower bound on this measure within the class of random menu cost models.

JEL Classification: C41,C61,E31

Suggested Citation

Alvarez, Fernando and Lippi, Francesco and Oskolkov, Aleksei, The Macroeconomics of Sticky Prices with Generalized Hazard Functions (June 30, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-90, Available at SSRN: https://ssrn.com/abstract=3639596 or http://dx.doi.org/10.2139/ssrn.3639596

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

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

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Italy

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Aleksei Oskolkov

University of Chicago

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