Temporary Price Changes, Inflation Regimes, and the Propagation of Monetary Shocks
- (pp. 104-52)
Abstract
We present a sticky price model that features the coexistence of many price changes, most of which are temporary, with a modest flexibility of the aggregate price level. Stickiness is introduced in the form of a price plan, namely a set of two prices: either price can be charged at any moment but changing the plan entails a menu cost. We analytically solve for the optimal plan and for the aggregate output response to a monetary shock. We present evidence consistent with the model implications using scanner data, as well as Consumer Price Index data across a wide range of inflation rates.Citation
Alvarez, Fernando, and Francesco Lippi. 2020. "Temporary Price Changes, Inflation Regimes, and the Propagation of Monetary Shocks." American Economic Journal: Macroeconomics, 12 (1): 104-52. DOI: 10.1257/mac.20180383Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- E31 Price Level; Inflation; Deflation
- E52 Monetary Policy
- L11 Production, Pricing, and Market Structure; Size Distribution of Firms
- O11 Macroeconomic Analyses of Economic Development
- O23 Fiscal and Monetary Policy in Development
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