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The Analytic Theory of a Monetary Shock

Author

Listed:
  • Fernando Alvarez

    (University of Chicago and NBER)

  • Francesco Lippi

    (LUISS University and EIEF)

Abstract
We propose a new method to analyze the propagation of a once and for all shock in a broad class of sticky price models. The method is based on the eigenvalue-eigenfunction representation of the cross-sectional process for price adjustments and provides a thorough characterization of the entire impulse response function of any moment or function of interest, in response to a once-and-for-all aggregate shock (any displacement of the initial distribution). We use the method (i) to discuss a general analytic characterization of the “selection effect” in sticky-price models, (ii) to show that the response of the cross-sectional dispersion of prices to a small shock is zero at all horizons, (iii) to derive a parsimonious representation of the output response to monetary shocks, and the key parameters determining its shape, (iv) to study the propagation of monetary shocks after a change in volatility.

Suggested Citation

  • Fernando Alvarez & Francesco Lippi, 2019. "The Analytic Theory of a Monetary Shock," EIEF Working Papers Series 1910, Einaudi Institute for Economics and Finance (EIEF), revised May 2019.
  • Handle: RePEc:eie:wpaper:1910
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    File URL: http://www.eief.it/eief/images/WP_19.10.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Baley, Isaac & Blanco, Andres, 2022. "The Long-Run Effects of Corporate Tax Reforms," CEPR Discussion Papers 16936, C.E.P.R. Discussion Papers.
    2. Alberto Cavallo & Francesco Lippi & Ken Miyahara, 2023. "Large Shocks Travel Fast," NBER Working Papers 31659, National Bureau of Economic Research, Inc.
    3. Georgii Riabov & Aleh Tsyvinski, 2021. "Policy with stochastic hysteresis," Papers 2104.10225, arXiv.org.
    4. Yuki SHIGETA, 2022. "A Continuous-Time Utility Maximization Problem with Borrowing Constraints in Macroeconomic Heterogeneous Agent Models:A Case of Regular Controls under Markov Chain Uncertainty," Discussion papers e-22-009, Graduate School of Economics , Kyoto University.
    5. Fernando Alvarez & Francesco Lippi, 2022. "The Analytic Theory of a Monetary Shock," Econometrica, Econometric Society, vol. 90(4), pages 1655-1680, July.
    6. Isaac Baley & Andrés Blanco, 2021. "Aggregate Dynamics in Lumpy Economies," Econometrica, Econometric Society, vol. 89(3), pages 1235-1264, May.
    7. Zhouzhou Gu & Mathieu Lauri`ere & Sebastian Merkel & Jonathan Payne, 2024. "Global Solutions to Master Equations for Continuous Time Heterogeneous Agent Macroeconomic Models," Papers 2406.13726, arXiv.org.
    8. Krueger, Dirk & Uhlig, Harald, 2022. "Neoclassical Growth with Limited Commitment," CEPR Discussion Papers 17757, C.E.P.R. Discussion Papers.
    9. Bocquet, L., 2024. "The Network Origin of Slow Labor Reallocation," Janeway Institute Working Papers 2427, Faculty of Economics, University of Cambridge.
    10. Fernando Alvarez & Francesco Lippi & Panagiotis Souganidis, 2023. "Price Setting With Strategic Complementarities as a Mean Field Game," Econometrica, Econometric Society, vol. 91(6), pages 2005-2039, November.
    11. Dirk Krueger & Harald Uhlig, 2024. "Neoclassical Growth with Limited Commitment," PIER Working Paper Archive 24-021, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    12. Isaac Baley & Andrés Blanco, 2022. "The Macroeconomics of Partial Irreversibility," Working Papers 1312, Barcelona School of Economics.
    13. Leonard Bocquet, 2022. "The Network Origin of Slow Labor Reallocation," PSE Working Papers halshs-03703862, HAL.
    14. Dirk Krueger & Harald Uhlig, 2022. "Neoclassical Growth with Long-Term One-Sided Commitment Contracts," NBER Working Papers 30518, National Bureau of Economic Research, Inc.
    15. Leonard Bocquet, 2022. "The Network Origin of Slow Labor Reallocation," Working Papers halshs-03703862, HAL.
    16. Bocquet, L., 2024. "The Network Origin of Slow Labor Reallocation," Cambridge Working Papers in Economics 2465, Faculty of Economics, University of Cambridge.

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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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