Working Paper: CEPR ID: DP12638
Authors: Fernando Alvarez; Francesco Lippi
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: sticky prices; menu cost models; temporary price changes; reference prices; price plans; price flexibility
JEL Codes: E3; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| temporary price changes (P22) | real effect of monetary shock (E39) |
| temporary price changes (P22) | monetary policy transmission (F42) |
| model with temporary prices (C54) | larger real effect of monetary shock (E19) |
| frequency of reference price changes held constant (E30) | smaller effect of monetary shock in model with temporary prices (E39) |
| simpler models (C20) | underestimations of monetary policy impact (E52) |