Working Paper: CEPR ID: DP9488
Authors: Fernando E. Alvarez; Francesco Lippi; Luigi Paciello
Abstract: We compute the impulse response of output to an aggregate monetary shock in a general equilibrium when firms set prices subject to a costly observation of the state and a menu cost. We study how the aggregate effects of a monetary shock depend on the relative size of these costs. We find that empirically reasonable observations costs increase the impact and the persistence of the output response to monetary shocks compared to models with menu cost only, flattening the shape of the impulse response function. Moreover we show that if the shocks are not large the results are independent of the assumption of whether firms know the realization of the monetary shock on impact.
Keywords: Impulse responses; Inattentiveness; Monetary shocks; Sticky prices
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher observation costs relative to menu costs (D24) | larger and more persistent output response to monetary shocks (E19) |
| ratio of observation to menu costs (D24) | shape of the impulse response function (C22) |
| information structure regarding observability of monetary shocks (E19) | output predictions (C67) |