Fernando Alvarez, Hervé Le Bihan, Francesco Lippi, 30 September 2014

The assumption of sticky prices is central in understanding the effect of monetary policies on the economy. Yet, how best to model price stickiness is an unresolved issue. This column assesses a selection of models that are able to reproduce cross-sectional heterogeneity in the setting of prices. The authors derive a formula which gives a useful approximation of the effect of a small monetary shock on total output. The formula demonstrates the importance of the Kurtosis of the distribution of price changes. It can be applied to a large class of models, including such with different timing of price adjustment.

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