The Analytic Theory of a Monetary Shock
Year: 2022
Type: article
Abstract: We propose an analytical method to analyze the propagation of an aggregate shock in a broad class of sticky‐price models. The method is based on the eigenvalue‐eigenfunction representation of the dynamics of the cross‐sectional distribution of firms' desired adjustments. A key novelty is that we can approximate the whole profile of the impulse response for any moment of interest in response to an aggregate shock (any displacement of the invariant distribution). We present several applications for an economy with low inflation and idiosyncratic shocks. We show that the shape of the impulse response of the canonical menu cost model is fully encoded by a single parameter, just like the Calvo model, although the shapes are very different. A model with a quadratic hazard function, arguably a good fit to the micro data on price setting, yields an impulse response that is close to the canonical menu cost model.
Source: Econometrica
DOI: 10.3982/ecta17348
Authors: Fernando Alvarez, Francesco Lippi
Language: English
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $4,600
OpenAlex ID: W4286543772