NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Small and Large Price Changes and the Propagation of Monetary Shocks

Fernando Alvarez, Hervé Le Bihan, Francesco Lippi

NBER Working Paper No. 20155
Issued in May 2014
NBER Program(s):EFG, ME

We document the presence of both small and large price changes in individual price records from the CPI in France and the US. After correcting for measurement error and cross-section heterogeneity, the size-distribution of price changes has a positive excess kurtosis. We propose an analytical menu cost model that encompasses several classic models, as Taylor (1980), Calvo (1983), Reis (2006), Golosov and Lucas (2007) and accounts for observed cross-sectional patterns. We show that the ratio of kurtosis to the frequency of price changes is a sufficient statistics for the real effects of monetary policy in a large class of models.

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Document Object Identifier (DOI): 10.3386/w20155

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