March 2017

The Skewness of the Price Change Distribution: A New Touchstone for Sticky Price Models

Shaowen Luo and Daniel Villar


We present a new way of empirically evaluating various sticky price models used to assess the degree of monetary non-neutrality. While menu cost models uniformly predict that price change skewness and dispersion fall with inflation, in the Calvo model both rise. However, CPI price data from the late 1970's onwards shows that skewness does not fall with inflation, while dispersion does. We develop a random menu cost model that, with a menu cost distribution that has a strong Calvo feature, can match the empirical patterns found. The model therefore exhibits much more monetary non-neutrality than existing menu cost models.

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Keywords: Inflation, Monetary policy, Prices, business fluctuations, and cycles


PDF: Full Paper

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Last Update: January 09, 2020