Temporary price changes and the real effects of monetary policy
By: Patrick J. Kehoe and Virgiliu Midrigin.
Contributors: Midrigan, Virgiliu.; Federal Reserve Bank of Minneapolis. Research Dept.
Series: Working paper / Federal Reserve Bank of Minneapolis, Research Dept -- 661
Publisher: Federal Reserve Bank of Minneapolis, Research Dept.
Published: 2008
Place of publication: [Minneapolis, MN]
Language: eng
Format: Electronic resource
Description: In the data, a large fraction of price changes are temporary. We provide a simple menu cost model which explicitly includes a motive for temporary price changes. We show that this simple model can account for the main regularities concerning temporary and permanent price changes. We use the model as a benchmark to evaluate existing shortcuts that do not explicitly model temporary price changes. One shortcut is to take the temporary changes out of the data and fit a simple Calvo model to it. If we do so prices change only every 50 weeks and the Calvo model overestimates the real effects of monetary shocks by almost 70%. A second shortcut is to leave the temporary changes in the data. If we do so prices change every 3 weeks and the Calvo model produces only 1/9 of the real effects of money as in our benchmark. We show that a simple Calvo model can generate the same real effects as our benchmark model if we set parameters so that prices change every 17 weeks.
Notes: Title from PDF file (viewed on Oct. 10, 2008).

"May 2008."

Includes bibliographical references.

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