Temporary Price Changes and the Real Effects of Monetary Policy / Patrick J. Kehoe, Virgiliu Midrigan.

Format:

Book

Author/Creator:

Kehoe, Patrick J.

Contributor:

National Bureau of Economic Research.

Midrigan, Virgiliu.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14392.

NBER working paper series no. w14392

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2008.

Summary:

In the data, prices change both temporarily and permanently. Standard Calvo models focus on permanent price changes and take one of two shortcuts when confronted with the data: drop temporary changes from the data or leave them in and treat them as permanent. We provide a menu cost model that includes motives for both types of price changes. Since this model accounts for the main regularities of price changes, its predictions for the real effects of monetary policy shocks are useful benchmarks against which to judge existing shortcuts. We find that neither shortcut comes close to these benchmarks. For monetary policy analysis, researchers should use a menu cost model like ours or at least a third, theory-based shortcut: set the Calvo model's parameters so that it generates the same real effects from monetary shocks as does the benchmark menu cost model. Following either suggestion will improve monetary policy analysis.

Notes:

Print version record

October 2008.