Monetary Shocks in a Model with Inattentive Producers

Luigi Paciello (EIEF)

Riccardo Faini CEIS Seminars

Riccardo Faini CEIS Seminars
When

Friday, October 12, 2012 h. 12:00-13:30

Where
Room B - 1st floor
Description

 We study a sticky price model in which prices respond sluggishly to shocks because fi rms must pay a fixed cost to observe the determinants of the profi t maximizing price, as pioneered by Caballero (1989) and Reis (2006). In these set-ups fi rms change prices only when they gather the relevant information. We extend their analysis to the case of random transitory variation in the firm's observation cost. We characterize the mapping from the distribution of observation cost to the distribution of the times between consecutive observations of a fi rm. We show how to aggregate a continuum of those distributions to characterize the cross-sectional distribution of the times until the next adjustment, an object that is key to characterize the response of the economy to aggregate shocks. While deriving this result, we comment on some incorrect interpretation that appear in the literature about this aggregation results. Finally, we examine the dependence of the real eff ect of a monetary shock, and of the distribution of price changes, on the mean and the variance of the times between consecutive observations. We conclude that transitory variation in observation costs has a modest eff ect on the aggregate response of the economy to a monetary shock.

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