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The Analytic Theory of a Monetary Shock

Author

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  • Fernando Alvarez

    (University of Chicago - Department of Economics; National Bureau of Economic Research (NBER))

  • Francesco Lippi

    (University of Sassari)

Abstract

We propose an analytical 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 dynamics of the cross-sectional distribution of firms’ desired adjustments. A key novelty is that, under assumptions that are appropriate for low-inflation economies, 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 and discuss extensions.

Suggested Citation

  • Fernando Alvarez & Francesco Lippi, 2021. "The Analytic Theory of a Monetary Shock," Working Papers 2021-21, Becker Friedman Institute for Research In Economics.
    • Handle: RePEc:bfi:wpaper:2021-21
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    References listed on IDEAS

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    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. 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.
    3. Alberto Cavallo & Francesco Lippi & Ken Miyahara, 2023. "Large Shocks Travel Fast," NBER Working Papers 31659, National Bureau of Economic Research, Inc.
    4. Georgii Riabov & Aleh Tsyvinski, 2021. "Policy with stochastic hysteresis," Papers 2104.10225, arXiv.org.
    5. 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.
    6. Fernando Alvarez & Francesco Lippi, 2022. "The Analytic Theory of a Monetary Shock," Econometrica, Econometric Society, vol. 90(4), pages 1655-1680, July.
    7. Isaac Baley & Andrés Blanco, 2021. "Aggregate Dynamics in Lumpy Economies," Econometrica, Econometric Society, vol. 89(3), pages 1235-1264, May.
    8. 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.
    9. Leonard Bocquet, 2022. "The Network Origin of Slow Labor Reallocation," PSE Working Papers halshs-03703862, HAL.
    10. Dirk Krueger & Harald Uhlig, 2022. "Neoclassical Growth with Long-Term One-Sided Commitment Contracts," NBER Working Papers 30518, National Bureau of Economic Research, Inc.
    11. Krueger, Dirk & Uhlig, Harald, 2022. "Neoclassical Growth with Limited Commitment," CEPR Discussion Papers 17757, C.E.P.R. Discussion Papers.
    12. Leonard Bocquet, 2022. "The Network Origin of Slow Labor Reallocation," Working Papers halshs-03703862, HAL.
    13. Bocquet, L., 2024. "The Network Origin of Slow Labor Reallocation," Janeway Institute Working Papers 2427, Faculty of Economics, University of Cambridge.
    14. Bocquet, L., 2024. "The Network Origin of Slow Labor Reallocation," Cambridge Working Papers in Economics 2465, Faculty of Economics, University of Cambridge.
    15. 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.
    16. Isaac Baley & Andrés Blanco, 2022. "The Macroeconomics of Partial Irreversibility," Working Papers 1312, Barcelona School of Economics.

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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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