Monetary Shocks in a Model with Inattentive Producers
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 transitory 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 reviews/ 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.
Year of publication: |
2012-08
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Authors: | Alvarez, Fernando ; Lippi, Francesco ; Paciello, Luigi |
Institutions: | Istituto Einaudi per l'Economia e la Finanza (EIEF) |
Saved in:
freely available
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