Working Paper: NBER ID: w14001
Authors: Emi Nakamura; J. N. Steinsson
Abstract: Empirical evidence suggests that as much as 1/3 of the U.S. business cycle is due to nominal shocks. We calibrate a multi-sector menu cost model using new evidence on the cross-sectional distribution of the frequency and size of price changes in the U.S. economy. We augment the model to incorporate intermediate inputs. We show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non-neutrality generated by the model. We furthermore show that the introduction of intermediate inputs raises the degree of monetary non-neutrality by another factor of three, without adversely affecting the model's ability to match the large average size of price changes. Our multi-sector menu cost model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 23% of the U.S. business cycle.
Keywords: No keywords provided
JEL Codes: E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heterogeneity in the frequency of price changes (E30) | degree of monetary nonneutrality (E49) |
| incorporating intermediate inputs (C67) | degree of monetary nonneutrality (E49) |
| nominal shocks (E39) | variations in real output (E23) |
| heterogeneity in price setting (L11) | monetary nonneutrality (E49) |
| calibrated aggregate nominal shocks (E19) | U.S. business cycle fluctuations (F44) |