Empirical Investigation of a Sufficient Statistic for Monetary Shocks

52 Pages Posted: 24 Nov 2021

See all articles by Fernando Alvarez

Fernando Alvarez

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

Andrea Ferrara

Northwestern University

Erwan Gautier

Banque de France - Centre de Recherche

Hervé le Bihan

Banque de France - Centre de Recherche

Francesco Lippi

LUISS university; Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR)

Date Written: November 22, 2021

Abstract

In a broad class of sticky price models the non-neutrality of nominal shocks is encoded by a simple sufficient statistic: the ratio of the kurtosis of the size-distribution of price changes over the frequency of price changes. We test this theoretical prediction using data for a large number of firms representative of the French economy. We use the micro data to measure the cross sectional moments, including kurtosis and frequency, for about 120 PPI industries and 220 CPI categories. We use a Factor Augmented VAR to measure the sectoral responses to a monetary shock, as summarized by the cumulative impulse response of sectoral prices (CIRP ), under three alternative identification schemes. The estimated CIRP correlates with the kurtosis and the frequency consistently with the prediction of the theory (i.e. they enter the relationship as a ratio). The analysis also shows that other moments not suggested by the theory, such as the mean, standard deviation and skewness of the size-distribution of price changes, are not correlated with the CIR. Several robustness checks are discussed.

JEL Classification: E31,E5

Suggested Citation

Alvarez, Fernando and Ferrara, Andrea and Gautier, Erwan and Le Bihan, Herve and Lippi, Francesco, Empirical Investigation of a Sufficient Statistic for Monetary Shocks (November 22, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-140, Available at SSRN: https://ssrn.com/abstract=3970033 or http://dx.doi.org/10.2139/ssrn.3970033

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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Andrea Ferrara

Northwestern University ( email )

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Erwan Gautier

Banque de France - Centre de Recherche ( email )

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France

Herve Le Bihan

Banque de France - Centre de Recherche ( email )

31 rue Croix des Petits Champs
Room 41-1391
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France

Francesco Lippi

LUISS university ( email )

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Rome, 00161
Italy

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

Via Due Macelli, 73
Rome, 00187
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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