S. Borağan Aruoba, Eugene Oue, Felipe Saffie, and Jonathan L. Willis
Working Paper 2023-3
April 2023
Abstract:
We propose a parsimonious framework for real rigidities, in the form of strategic complementarities, that can generate real and nominal dynamics and match key features of the data across several literatures. Existing menu-cost models featuring strategic complementarities require unrealistically volatile shocks to idiosyncratic productivity to be consistent with pricing moments. We develop a simple menu-cost model with strategic complementarities along with idiosyncratic productivity and demand shocks that are disciplined by the data. This approach allows us to overcome previous criticism from analysis of models that employ only an idiosyncratic productivity shock and calibrate solely using data from the price-adjustment literature. Despite its simplicity, the model can generate sizable monetary nonneutrality along with the magnitude of cost pass-through documented in previous studies, while also remaining consistent with micro pricing and markup evidence.
JEL classification: D02, E02, E44, G21
Key words: menu costs, strategic complementarities, demand shocks, sticky prices, monetary nonneutrality
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 would like to thank Laura Castillo-Martínez (discussant), John Haltiwanger, Pete Klenow, Virgiliu Midrigan, Luminita Stevens, Javier Turén, and seminar participants at the University of Maryland, the Federal Reserve Board of Governors, the University of Iowa, Georgetown University, PUC-Chile, Michigan State University, the European Central Bank, the Deutsche Bundesbank, and North Carolina State University for useful comments and suggestions.
S. Borağan Aruoba and Eugene Oue are with the University of Maryland. 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.
To receive e-mail notifications about new papers, subscribe. Under "Publications" select "Working Papers."