Monetary Non-Neutrality in a Multi-Sector Menu Cost Model / Emi Nakamura, Jón Steinsson.

Format:

Book

Author/Creator:

Nakamura, Emi.

Contributor:

National Bureau of Economic Research.

Steinsson, Jón.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14001.

NBER working paper series no. w14001

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2008.

Summary:

Empirical evidence suggests that as much as 1/3 of the U.S. business cycle is due to nominal shocks. We calibrate a multi-sector menu cost model using new evidence on the cross-sectional distribution of the frequency and size of price changes in the U.S. economy. We augment the model to incorporate intermediate inputs. We show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non-neutrality generated by the model. We furthermore show that the introduction of intermediate inputs raises the degree of monetary non-neutrality by another factor of three, without adversely affecting the model's ability to match the large average size of price changes. Our multi-sector menu cost model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 23% of the U.S. business cycle.

Notes:

Print version record

May 2008.