Working Paper: CEPR ID: DP9228
Authors: Fernando E. Alvarez; Francesco Lippi; Luigi Paciello
Abstract: We study a model in which prices respond slowly to shocks because firms must pay a fixed cost to observe the determinants of the profit maximizing price, as pioneered by Caballero (1989) and Reis (2006). We extend their analysis to the case of random tran- sitory variation in the firm?s observation cost and characterize the mapping from the distribution of observation cost to the distribution of the times between consecutive re- views/price adjustments of a firm. We aggregate a continuum of firms and characterize analytically the cross-sectional distribution of the duration of reviews/prices. We establish the dependence of the real effect of a monetary shock on the distribution of price durations and hence on the distribution of observation costs and discuss applications.
Keywords: Impulse Responses; Inattentiveness; Monetary Shocks; Observation Costs
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary shocks (E39) | output response (C67) |
| distribution of observation costs (D39) | timing and frequency of price reviews (L11) |
| timing and frequency of price reviews (L11) | output response (C67) |
| distribution of observation costs (D39) | output response (C67) |
| average duration of time between price reviews (C41) | cumulative output response (E23) |
| coefficient of variation of review durations (C41) | cumulative output response (E23) |