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Non-Constant Demand Elasticities, Firm Dynamics and Monetary Non-Neutrality: Role of Demand Shocks

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Listed:
  • S. Borağan Aruoba
  • Eugene Oue
  • Felipe Saffie
  • Jonathan Willis

Abstract

We develop a simple menu-cost model with non-constant elasticity of demand that features idiosyncratic productivity and demand shocks. The model is calibrated to match firm-level productivity and demand processes estimated from U.S. data. Despite its simplicity, the calibrated model delivers untargeted pricing dynamics and a markup distribution that are consistent with U.S. micro data. Moreover, it also generates sizable monetary non-neutrality that rivals more complicated alternative menu cost models that explicitly target pricing dynamics. The key in reconciling firm and pricing dynamics comes from the interaction between non-constant elasticity of demand and idiosyncratic demand shocks. Thus, this framework effortlessly unifies pricing, markup, and firm dynamics.

Suggested Citation

  • S. Borağan Aruoba & Eugene Oue & Felipe Saffie & Jonathan Willis, 2024. "Non-Constant Demand Elasticities, Firm Dynamics and Monetary Non-Neutrality: Role of Demand Shocks," NBER Working Papers 32518, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32518
    Note: ME
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    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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