Working Paper: NBER ID: w3729
Authors: Ricardo J. Caballero; Eduardo M. R. Engel
Abstract: When firms face menu costs, the relation between their output and money is highly nonlinear. At the aggregate level, however, this needs not be so. In this paper we study the dynamic behavior of a general equilibrium menu-cost economy where firms are heterogeneous in the shocks they perceive, and the demands and adjustment Costs they face. In this context we (i) generalize the Caplin and Spulber [1987] steady state monetary neutrality result; (ii) show that uniqueness of equilibria depends not only on the degree of strategic complementarities but also on the degree of dispersion of firms' positions in their price-cycle; (iii) characterize the path of output outside the steady state and show that as strategic complementarities become more important, expansions become longer and smoother than contractions; and (iv) show that the potential effectiveness of monetary policy is an increasing function of the distance of the economy from its steady state, but that an uninformed policy maker will have no effect on output on average.
Keywords: Menu Costs; Heterogeneity; Output Fluctuations; Monetary Policy
JEL Codes: E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strategic complementarities (D10) | uniqueness of equilibria (C62) |
| dispersion of firms' price deviations (L11) | uniqueness of equilibria (C62) |
| strategic complementarities (D10) | output expansions (E23) |
| monetary policy (E52) | output outside steady state (D57) |
| information about distribution of firms' price deviations (L11) | monetary policy effectiveness on output (E52) |
| absence of information (D83) | average effect of monetary policy (E52) |