TY  - JOUR
AU  - Kehoe,Patrick J.
AU  - Midrigan,Virgiliu
TI  - Temporary Price Changes and the Real Effects of Monetary Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14392
PY  - 2008
Y2  - October 2008
UR  - http://www.nber.org/papers/w14392
L1  - http://www.nber.org/papers/w14392.pdf
N1  - Author contact info:
Patrick Kehoe
Research Department
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN  55480-0291
Tel: 612/204-5525
Fax: 612/204-5515
E-Mail: pkehoe@res.mpls.frb.fed.us

Virgiliu Midrigan
Department of Economics
New York University
19 W. 4th St.
New York, NY 10012
Tel: 212/992-8081
Fax: 212/995-4186
E-Mail: virgiliu.midrigan@nyu.edu
AB  - 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.
ER  -