S. Borağan Aruoba, Eugene Oue, Felipe Saffie, and Jonathan L. Willis
Working Paper 2023-3b
April 2023 (Revised January 2025)
Abstract:
We revisit the role of micro real rigidities as a driver of monetary non-neutrality, using a simple menu-cost model featuring non-constant elasticity of demand with both idiosyncratic productivity and demand shocks. The model is calibrated to match firm-level productivity and demand processes estimated from US data. Despite its simplicity, the calibrated model overturns prior negative findings in the literature on micro real rigidities and generates sizeable monetary non-neutrality comparable to alternative frameworks. Additionally, the model reproduces untargeted pricing dynamics and a markup distribution consistent with US microdata. As a result, this framework effortlessly unifies pricing, markup behavior, and firm dynamics. The key to reconciling firm-level and pricing dynamics lies in the interaction between non-constant demand elasticity and idiosyncratic demand shocks.
JEL classification: E30, E52, L11
Key words: menu costs, strategic complementarities, demand shocks, sticky prices, monetary non-neutrality
https://doi.org/10.29338/wp2023-03
The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility. The authors are grateful for the invaluable feedback they received on an earlier draft from Jón Steinsson. The authors would like to thank Isaac Baley, Mark Bils, Laura Castillo-Martínez (discussant), Basile Grassi, Susanto Basu, John Haltiwanger, Pete Klenow, Francesco Lippi, Virgiliu Midrigan, Luminita Stevens, Javier Turén, Rosen Valchev, and seminar participants at the NBER 2024 SI (ME), UC Berkeley, Boston College, the University of Maryland, the Federal Reserve Board of Governors, the Federal Reserve Banks of Atlanta and Richmond, ITAM, IMF, Banque de France, BIS, Bocconi, EIEF, CREI, the University of Iowa, Georgetown University, PUC-Chile, Michigan State University, the European Central Bank, the Deutsche Bundesbank, the European University Institute, and North Carolina State University for useful comments and suggestions.
S. Borağan Aruoba is with the University of Maryland and NBER. Eugene Oue is with Hong Kong Polytechnic University. Felipe Saffie is with the University of Virginia's Darden School of Business. Please address questions regarding content to Jonathan L. Willis, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree St. NE, Atlanta, GA 30309.
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