Persistent Monetary Non-Neutrality in an Estimated Menu-Cost Model with Partially Costly Information

48 Pages Posted: 27 Mar 2016 Last revised: 2 Aug 2021

See all articles by Marco Bonomo

Marco Bonomo

Insper Institute of Education and Research

Carlos Carvalho

Asset 1 Investment Company; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques; University of Montreal

Vivian Malta

World Bank; International Monetary Fund (IMF) - Policy Development and Review Department

Rodolfo Rigato

Harvard University

Date Written: July 31, 2021

Abstract

We propose a model that reconciles microeconomic evidence of frequent and large price changes with sizable monetary non-neutrality. Firms incur separate lump-sum costs to change prices and to gather and process some information about marginal costs. Additional relevant information is continuously available, and can be factored into pricing decisions at no cost. We estimate the model by Simulated Method of Moments, using price-setting statistics for the U.S. economy. The model with free idiosyncratic and costly aggregate information fits well both targeted and untargeted microeconomic moments and generates more than twice as much monetary non-neutrality as the Calvo model.

Keywords: menu costs, information costs, infrequent information, partial information, inattentiveness, optimal price setting, state-dependent pricing, time-dependent pricing

JEL Classification: E00, E31

Suggested Citation

Bonomo, Marco and Carvalho, Carlos and Garcia, René and Malta, Vivian and Dinis Rigato, Rodolfo, Persistent Monetary Non-Neutrality in an Estimated Menu-Cost Model with Partially Costly Information (July 31, 2021). Available at SSRN: https://ssrn.com/abstract=2755119 or http://dx.doi.org/10.2139/ssrn.2755119

Marco Bonomo

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

Carlos Carvalho (Contact Author)

Asset 1 Investment Company ( email )

Avenida Juscelino Kubitschek, 1600/Conj 52
São Paulo, São Paulo
Brazil

HOME PAGE: http://www.asset1.com.br

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-985-4014 (Phone)

University of Montreal ( email )

United States

Vivian Malta

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

Rodolfo Dinis Rigato

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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