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
Date Written: July 31, 2021
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: Suggested Citation