Monetary policy analyses usually assume an atomistic private sector, thereby ignoring potential interactions between policy and wage-setting decisions. Yet, non-atomistic wage setters are a key feature of several industrialized economies. We study the economic consequence of non-atomistic agents and show that this qualifies previous results on the effects and desirability of a conservative central banker. In particular, the central bank aversion to inflation may have a permanent effect on structural employment, while no such effect emerges with atomistic agents.

A monetary union is modelled as a technology that makes a surprise policy deviation impossible and requires voluntarily participating countries to follow the same monetary policy. Within a fully dynamic context, we show that such an arrangement may dominate a regime with independent national currencies. Two new results are delivered by the voluntary participation assumption. First, the optimal plan is shown to respond to a country's temptation to leave the union by tilting both current and future policy in its favour. This yields a non-linear rule according to which each country weight in policy decisions is time-varying and depends on its incentive to abandon the union. Second, we show that there might be conditions such that a break-up of the union, as has occurred in some historical episodes, is efficient. The paper thus provides a first formal analysis of the incentives behind the formation, sustainability, and disruption of a monetary union.

We propose an analytical method to analyze the propagation of an aggregate shock in a broad class of sticky‐price models. The method is based on the eigenvalue‐eigenfunction representation of the dynamics of the cross‐sectional distribution of firms' desired adjustments. A key novelty is that we can approximate the whole profile of the impulse response for any moment of interest in response to an aggregate shock (any displacement of the invariant distribution). We present several applications for an economy with low inflation and idiosyncratic shocks. We show that the shape of the impulse response of the canonical menu cost model is fully encoded by a single parameter, just like the Calvo model, although the shapes are very different. A model with a quadratic hazard function, arguably a good fit to the micro data on price setting, yields an impulse response that is close to the canonical menu cost model.

The empirical evidence on rational inattention lags the theoretical developments: micro evidence on one of the most immediate consequences of observation costs––the infrequent observation of state variables––is not available in standard datasets. We contribute to filling the gap using new household surveys. To match these data we modify existing models, shifting the focus from nondurable to durable consumption. The model features both observation and transaction costs and implies a mixture of time-dependent and state-dependent rules. Numerical simulations explain the frequencies of trading and observation of the median investor with small observation costs and larger transaction costs. (JEL D12, D14, E21, G11)

We prove that the ratio of kurtosis to the frequency of price changes is a sufficient statistic for the real effects of monetary shocks, measured by the cumulated output response following the shock. The sufficient statistic result holds in a large class of models which includes Taylor (1980); Calvo (1983); Reis (2006 ); Golosov and Lucas (2007 ); Nakamura and Steinsson (2010); Midrigan (2011); and Alvarez and Lippi (2014). Several models in this class are able to account for the positive excess kurtosis of the size distribution of price changes that appears in the data. We review empirical measures of kurtosis and frequency and conclude that a model that successfully matches the microevidence on kurtosis and frequency produces real effects that are about four times larger than in the Golosov-Lucas model, and about 30 percent below those of the Calvo model. We discuss the robustness of our results to changes in the setup, including small inflation and leptokurtic cost shocks. (JEL, E23, E31)

We document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from pre-cautionary motives. We extend the Baumol-Tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost. This modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM termi-nals. We characterize the solution of the model and show that qualitatively it is able to reproduce the empirical patterns. Estimating the structural pa-rameters we show that the model quantitatively accounts for key features of the data. The estimates are used to quantify the expenditure and interest rate elasticity of money demand, the impact of financial innovation on money demand, the welfare cost of inflation, the gains of disinflation and the benefit of ATM ownership.

We give a full analytic characterization of a large class of sticky-price models where the firm’s price-setting behavior is described by a generalized hazard function. Such a function allows for a vast variety of empirical hazards to be fitted. This setup is microfounded by random adjustment costs, as in Caballero and Engel (1999), or by information frictions, as in Woodford (2009). We establish two main results. First, we show how to identify all the primitives of the model, including the distribution of the fundamental adjustment costs and the implied generalized hazard function, using the distribution of price changes. Second, we derive a sufficient statistic for the aggregate effect of a monetary shock: given an arbitrary generalized hazard function, the cumulative impulse response of output to a once-and-for-all monetary shock is proportional to the ratio of the kurtosis of the steady-state distribution of price changes over the frequency of price adjustment. We prove that Calvo’s model yields the upper bound and Golosov and Lucas’s model the lower bound on this measure in the class of random menu cost models.

We study models where prices respond slowly to shocks because firms are rationally inattentive. Producers must pay a cost to observe the determinants of the current profit maximizing price, and hence observe them infrequently. To generate large real effects of monetary shocks in such a model the time between observations must be long and/or highly volatile. Previous work on rational inattentiveness has allowed for observation intervals that are either constant-but-long (e.g. Caballero, 1989 or Reis, 2006) or volatile-but-short (e.g. Reis's, 2006 example where observation costs are negligible), but not both. In these models, the real effects of monetary policy are small for realistic values of the duration between observations. We show that non-negligible observation costs produce both of these effects: intervals between observations are infrequent and volatile. This generates large real effects of monetary policy for realistic values of the average time between observations.

We study the propagation of monetary shocks in a sticky‐price general equilibrium economy where the firms' pricing strategy features a complementarity with the decisions of other firms. In a dynamic equilibrium, the firm's price‐setting decisions depend on aggregates, which in turn depend on the firms' decisions. We cast this fixed‐point problem as a Mean Field Game and prove several analytic results. We establish existence and uniqueness of the equilibrium and characterize the impulse response function (IRF) of output following an aggregate shock. We prove that strategic complementarities make the IRF larger at each horizon. We establish that complementarities may give rise to an IRF with a hump‐shaped profile. As the complementarity becomes large enough, the IRF diverges, and at a critical point there is no equilibrium. Finally, we show that the amplification effect of the strategic interactions is similar across models: the Calvo model and the Golosov–Lucas model display a comparable amplification, in spite of the fact that the non‐neutrality in Calvo is much larger.

In a broad class of sticky-price models, the non-neutrality of nominal shocks is captured by a simple sufficient statistic: the ratio of the kurtosis of the price change distribution over the frequency of price changes. We test the sufficient statistic proposition using data for a large sample of products representative of the French economy. We first extend the theory to allow for empirically relevant monetary shocks with a transitory predictable component. We then use the microdata to measure kurtosis and frequency for about 120 producer price indices industries and 220 consumer price indices categories. We use a Factor-Augmented Vector Autoregressive (FAVAR) model to measure the industries’ response to monetary shocks, under alternative identification schemes. The estimated degree of non-neutrality correlates with the kurtosis and the frequency consistently with the predictions of the theory. Several robustness checks are discussed.