Heterogeneity in price setting

The first chapter of this dissertation introduces sectoral heterogeneity in price stickiness into an otherwise standard model to study how it affects the dynamics of monetary economies. Qualitative and quantitative results show that monetary shocks tend to have larger and more persistent real effects in heterogeneous economies, when compared to identical-firms economies with similar degrees of nominal and real rigidity. In the presence of pricing complementarities, sectors with lower frequencies of price adjustment have a disproportionate effect on the aggregate price level. In order to better approximate the dynamics of the calibrated heterogeneous economy, an identical-firms model requires a frequency of price changes that is up to three times lower than the average of the heterogeneous economy.; The second chapter, co-authored with Fernanda Nechio, investigates the purchasing power parity (PPP) puzzle in a multi-sector, two country sticky price model. Across sectors, firms differ in the extent of price stickiness, in accordance with recent microeconomic evidence on price setting in various countries. Combined with local currency pricing, this leads sectoral real exchange rates to have heterogeneous dynamics. When calibrated to match the recent microeconomic evidence on the frequency of price changes, in response to monetary disturbances the model produces a half-life of deviations from PPP of 45 months. In contrast, the half-life of such deviations in a counterfactual one-sector version of the world economy is only slightly above one year. Thus, there is no PPP puzzle in our multi-sector sticky price model, and we conclude that the empirical properties of deviations from PPP only warrant the "puzzle" adjective if seen under the lens of the one-sector model of the world economy.; The third chapter explores heterogeneity in pricing behavior in "sticky information" models. Firms adjust prices all the time, but only update their knowledge of the state of the economy sporadically. Across sectors, firms differ in the frequency with which they do so. Despite the nature of nominal frictions being quite different from price stickiness, the effects of heterogeneity are remarkably similar. When compared with one-sector economies with the same average frequency of information updating, heterogeneous sticky information economies display larger and more persistent dynamic responses to a variety of shocks. The results suggest that the effects of heterogeneity in price setting hold across a large set of models, and set the stage for the analysis of the subsequent chapter.; The fourth and last chapter, co-authored with Felipe Schwartzman, investigates the effects of heterogeneity in price setting in sticky price and sticky information models characterized by quite general adjustment hazard functions. In a large class of models heterogeneity leads monetary shocks to have larger real effects than in one-sector economies with the same frequency of adjustments. Quantitatively, the effects of heterogeneity in models calibrated to match the recent empirical evidence on pricing behavior are large, even in the absence of strategic complementarity in price setting. We find that the degree of monetary non-neutrality in the calibrated heterogeneous economies can be as large as in an otherwise identical one-sector economy with roughly three times more nominal rigidity.