The seminar will be held in the Visitor Center at 13:30 pm.
Abstract
Conventional wisdom in macroeconomics suggests that price stability is a suc cient condition to avoid important welfare losses arising from price stickiness. This idea is supported by sticky price models in which .rms only react to aggregate shocks. However, it is well documented that .rms also face idiosyncratic productivity shocks. In this paper, I investigate how the introduction of these shocks a¤ects the welfare implications of price rigidities. I develop an analytical framework to measure the welfare losses when .rms face idiosyncratic productivity shocks. Then, I compute these losses by using two alter- native price settings and di¤erent calibration exercises that match the data on individual price changes. Several interesting results emerge. First, even when the aggregate price level is stable, an economy can in- cur quantitatively important welfare losses. In particular, these losses can add up to 4.4 percent of steady state consumption with time de- pendent pricing; while they can reach up to 2.3 percent of steady state consumption with state dependent pricing. Second, welfare losses are always signi.cantly higher with time dependent pricing. Third, the variance of the idiosyncratic productivity shock and the frequency of price adjustments are the most important factors in determining the size of the welfare losses.
Keywords: Idiosyncratic Shocks, Price Rigidities, Welfare Analysis
JELclassi.cation: D40, D60, E31