Firm beliefs and monetary non-neutrality
In this paper Afrouzi et al. study how measured beliefs from surveys can be used to identify and quantify the real effects of monetary policy shocks in an economy with both nominal rigidities and endogenous information acquisition by firms. The authors develop a general equilibrium model with time-dependent pricing frictions and analyze how firms’ optimal dynamic information policies and their beliefs affect monetary non-neutrality. They implement their approach empirically using survey data on firms’ expectations from New Zealand.
Key Findings:
- Imperfect information amplifies monetary non-neutrality, but selection effects (price-setters being better informed) dampen it relative to models with exogenous information.
- Quantitatively, using the New Zealand survey data:
– Information frictions approximately double monetary non-neutrality relative to perfect information.
– Models with exogenous information would overstate monetary non-neutrality by about 50%.
– The effect of uncertainty on monetary non-neutrality is comparable in magnitude to the effect of price stickiness itself. - Greater microeconomic volatility significantly dampens the real effects of monetary policy.
- Increased price stickiness increases monetary non-neutrality, but by about 20% less than in full information models due to endogenous information acquisition.
What Can Measured Beliefs Tell Us About Monetary Non-Neutrality?
Authors: Hassan Afrouzi, Joel P. Flynn, Choongryul Yang
From: Columbia University, Yale University, Federal Reserve Board
Firm dynamics and monetary non-neutrality
Aruoba et al. develop a menu-cost model with non-constant elasticity of demand that features both idiosyncratic productivity and demand shocks. Their model uses a Kimball demand system, which allows for variable elasticity of demand, unlike standard constant elasticity of substitution (CES) models. The authors calibrate the model to match U.S. firm-level data from Foster et al. (2008). The calibrated model matches firm dynamics moments (productivity and demand processes) and one pricing moment (frequency of price changes).
Main Findings:
- The model successfully generates a realistic markup distribution that closely resembles empirical data, which is not possible with CES demand models.
- The model produces incomplete cost pass-through (38%) consistent with empirical estimates.
- It generates significant monetary non-neutrality, with 82% of a nominal shock reflected in real output on impact, and a cumulative response about 4 times larger than a simple CES menu cost model.
- The combination of non-constant elasticity demand (Kimball) and both productivity and demand shocks is crucial for reconciling firm dynamics, pricing behavior, and monetary non-neutrality.
- The model outperforms alternative specifications (CES models, models without demand shocks, translog demand) in simultaneously matching firm dynamics, pricing, markup, and monetary policy moments.
Non-Constant Demand Elasticities, Firm Dynamics, and Monetary Non-Neutrality: The Role of Demand Shocks
Authors: S. Boraǧan Aruoba, Eugene Oue, Felipe Saffie, Jonathan L. Willis
From: University of Maryland, Hong Kong Polytechnic University, University of Virginia, Federal Reserve Bank of Atlanta
