Do more frequent price adjustments guarantee less effective monetary stimulus when uncertainty rises?

Abstract

Probably not. When firms face higher uncertainty, they may reset their prices more frequently, but this does not necessarily mean that monetary policy is less effective in boosting real activity. In fact, the real effect of monetary policy may be strengthened because firms shift their attention away from the monetary policy shock to productivity shocks to minimize profit loss due to suboptimal price-setting. This conjecture is supported by a model with an information processing capacity constraint, which shows that monetary policy becomes more effective in stimulating the economy during periods of high uncertainty. Moreover, the model’s key characteristics and moments of price distribution match those observed in the micro price data.