Working Paper: CEPR ID: DP17473
Authors: Adrien Auclert; Rodolfo Rigato; Matthew Rognlie; Ludwig Straub
Abstract: We show that, in a broad class of menu cost models, the dynamics of aggregate inflation in response to arbitrary shocks to aggregate costs are nearly the same as in Calvo models with suitably chosen Calvo adjustment frequencies. We first prove that the canonical menu cost model is first-order equivalent to a mixture of two time-dependent models, which reflect the extensive and intensive margins of price adjustment. We then show numerically that, in any plausible parameterization, this mixture is well-approximated by a single Calvo model. This close numerical fit carries over to other standard specifications of menu cost models. Thus, the Phillips curve for a menu cost model looks like the New Keynesian Phillips curve, but with a higher slope.
Keywords: menu cost models; Calvo models; Phillips curve; monetary economics
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| arbitrary shocks to aggregate costs (E30) | dynamics of aggregate inflation (E31) |
| menu cost models (E10) | dynamics of aggregate inflation (E31) |
| Calvo models (C59) | dynamics of aggregate inflation (E31) |
| menu cost model (E10) | Phillips curve resemblance to New Keynesian Phillips curve (E31) |
| higher slope of Phillips curve in menu cost model (E31) | more responsive price adjustments to changes in marginal costs (D40) |
| close numerical fit between menu cost models and Calvo models (C54) | strong numerical equivalence (C30) |