Working Paper Series no. 492: Small and large price changes and the propagation of monetary shocks

Abstract

We document the presence of both small and large price changes in individual price records from the CPI in France and the US. After correcting for measurement error and cross-section heterogeneity, the size-distribution of price changes has a positive excess kurtosis. We propose an analytical menu cost model that encompasses several classic models, as Taylor (1980), Calvo (1983), Reis (2006), Golosov and Lucas (2007) and accounts for observed cross-sectional patterns. We show that the ratio of kurtosis to the frequency of price changes is a sufficient statistics for the real effects of monetary policy in a large class of models.

Fernando Alvarez, Hervé Le Bihan and Francesco Lippi
June 2014

Classification JEL : E3, E5

Keywords : price setting, micro evidence, size-distribution of price changes, kurtosis of price changes, menu-cost, Calvo pricing rule, output response to monetary shocks.