Monetary Non-Neutrality in a Multi-Sector Menu Cost Model
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.
We would like to thank Robert Barro for invaluable advice and encouragement. We would like to thank Dmitriy Sergeyev for excellent research assistance. We would also like to thank Alberto Alesina, Susanto Basu, Leon Berkelmans, Carlos Carvalho, Gauti Eggertsson, Mark Gertler, Mikhail Golosov, Oleg Itskhoki, Pete Klenow, John Leahy, Greg Mankiw, Virgiliu Midrigan, Ken Rogoff, Aleh Tsyvinski, Michael Woodford and seminar participants at numerous conferences and institutions for helpful discussions and comments. We are grateful to the Warburg Fund at Harvard University for financial support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Emi Nakamura & Jón Steinsson, 2010. "Monetary Non-Neutrality in a Multisector Menu Cost Model," The Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 961-1013, August. citation courtesy of