Do More Frequent Price Adjustments Imply Less Effective Monetary Stimulus as Uncertainty Rises?
57 Pages Posted: 19 May 2022
No. Even if firms reset their prices more frequently when they face higher uncertainty, monetary policy may not be less effective in boosting real activity when firms become less responsive to monetary policy. In this case, the real effect of monetary policy can be strengthened even though they reset their prices more often as firms pay less attention to monetary policy. We analyze the plausibility of the conjecture by introducing a model with an information processing capacity constraint. It turns out that monetary policy becomes more effective in stimulating the economy during periods of high uncertainty while at the same time the key characteristics and moments of price distribution match those observed in the micro price data. Finally, we also provide empirical evidence that can support the firm attention allocation implied by the model.
Keywords: Monetary policy asymmetry, Uncertainty, Information choice
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