Real Rigidities, Firm Dynamics, and Monetary Nonneutrality: The Role of Demand Shocks

: We propose a parsimonious framework for real rigidities, in the form of strategic complementarities, that can generate real and nominal dynamics and match key features of the data across several literatures. Existing menu-cost models featuring strategic complementarities require unrealistically volatile shocks to idiosyncratic productivity to be consistent with pricing moments. We develop a simple menu-cost model with strategic complementarities along with idiosyncratic productivity and demand shocks that are disciplined by the data. This approach allows us to overcome previous criticism from analysis of models that employ only an idiosyncratic productivity shock and calibrate solely using data from the price-adjustment literature. Despite its simplicity, the model can generate sizable monetary nonneutrality along with the magnitude of cost pass-through documented in previous studies, while also remaining consistent with micro pricing and markup evidence.

[1]  M. Trabandt,et al.  Understanding Post-COVID Inflation Dynamics , 2023, IMF Working Papers.

[2]  F. Álvarez,et al.  Price Setting with Strategic Complementarities as a Mean Field Game , 2022, SSRN Electronic Journal.

[3]  Simon Mongey,et al.  Market Structure and Monetary Non-neutrality , 2021, SSRN Electronic Journal.

[4]  Andrés Blanco.  Optimal Inflation Target in an Economy with Menu Costs and a Zero Lower Bound , 2021, American Economic Journal: Macroeconomics.

[5]  J. Haltiwanger,et al.  The Size and Life-Cycle Growth of Plants: The Role of Productivity, Demand and Wedges , 2020, SSRN Electronic Journal.

[6]  J. Konings,et al.  International Shocks, Variable Markups, and Domestic Prices , 2019, The Review of Economic Studies.

[7]  M. Trabandt,et al.  Resolving the Missing Deflation Puzzle , 2019, Journal of Monetary Economics.

[8]  D. Xu,et al.  How Costly Are Markups? , 2018, Journal of Political Economy.

[9]  Diego Daruich.  The Macroeconomic Consequences of Early Childhood Development Policies , 2018 .

[10]  Jan Eeckhout,et al.  The Rise of Market Power and the Macroeconomic Implications* , 2020, The Quarterly Journal of Economics.

[11]  David Berger,et al.  Shocks versus Responsiveness: What Drives Time-Varying Dispersion? , 2017, Journal of Political Economy.

[12]  H. L. Bihan,et al.  The real effects of monetary shocks in sticky price models. A sufficient statistic approach , 2016 .

[13]  V. Ramey,et al.  Macroeconomic Shocks and Their Propagation , 2016 .

[14]  Costas Arkolakis,et al.  The Elusive Pro-Competitive Effects of Trade , 2015 .

[15]  Joseph Vavra.  Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation , 2013 .

[16]  Emi Nakamura,et al.  Five Facts about Prices: A Reevaluation of Menu Cost Models , 2008 .

[17]  G. Gopinath,et al.  Frequency of Price Adjustment and Pass-Through , 2008 .

[18]  Emi Nakamura,et al.  Monetary Non-Neutrality in a Multi-Sector Menu Cost Model , 2008 .

[19]  Jonas D. M. Fisher,et al.  Estimating the frequency of price re-optimization in Calvo-style models , 2007 .

[20]  C. Hellwig,et al.  Prices and Market Shares in a Menu Cost Model , 2007 .

[21]  F. Smets,et al.  Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach , 2007 .

[22]  Ron S. Jarmin,et al.  Volatility and Dispersion in Business Growth Rates: Publicly Traded Versus Privately Held Firms , 2006 .

[23]  Peter J. Klenow,et al.  Real Rigidities and Nominal Price Changes , 2006 .

[24]  John Leahy,et al.  A Phillips Curve with an Ss Foundation , 2005, Journal of Political Economy.

[25]  Chad Syverson,et al.  Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability? , 2005 .

[26]  R. King,et al.  Implications of State-Dependent Pricing for Dynamic Macroeconomic Models , 2005 .

[27]  J. Campa,et al.  Exchange Rate Pass-Through into Import Prices , 2004, Review of Economics and Statistics.

[28]  Mikhail Golosov,et al.  Menu Costs and Phillips Curves , 2003, Journal of Political Economy.

[29]  Robert G. King,et al.  State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output , 1999 .

[30]  Per Krusell,et al.  Income and Wealth Heterogeneity in the Macroeconomy , 1998, Journal of Political Economy.

[31]  Lawrence J. Christiano,et al.  Monetary Policy Shocks: What Have We Learned and to What End? , 1998 .

[32]  Miles S. Kimball.  The Quantitative Analytics of the Basic Neomonetarist Model , 1995 .

[33]  Andrew Caplin,et al.  Menu Costs and the Neutrality of Money , 1987 .

[34]  N. Gregory Mankiw,et al.  Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly , 1985 .

[35]  Isaac Baley,et al.  Firm Uncertainty Cycles and the Propagation of Nominal Shocks , 2019, American Economic Journal: Macroeconomics.

[36]  J. Haltiwanger,et al.  Trade and Market Selection: Evidence from Manufacturing Plants in Colombia , 2012 .

[37]  U. Berkeley,et al.  The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound? , 2012 .

[38]  Sang V. Nguyen,et al.  VOLATILITY AND DISPERSION IN BUSINESS GROWTH RATES: PUBLICLY TRADED VERSUS PRIVATELY HELD FIRMS , 2006 .

[39]  Andrew Caplin,et al.  AGGREGATION AND OPTIMIZATION WITH STATE-DEPENDENT PRICING , 1997 .

[40]  Janet L. Yellen,et al.  Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria , 1985 .