Reviving Micro Real Rigidities: The Importance of Demand Shocks
Abstract
We revisit micro real rigidities as a source of monetary non-neutrality in a menu-cost model with variable markups, using firm-level evidence to pin down key primitives. We embed a non-CES demand system in a quantitative monetary model and use firm-dynamics evidence to identify demand curvature and firm-level productivity and demand processes. The calibrated model matches untargeted micro pricing moments, the markup distribution, and cost pass-through, while generating comparable non-neutrality. The key innovation is an empirically supported placement of idiosyncratic demand shocks that shifts residual demand, thereby moving desired markups and prices under non-CES demand. The broader implication is that this calibrated model provides a portable framework linking monetary economics with trade and IO evidence.
Keywords
Cite
@article{arxiv.2608.02817,
title = {Reviving Micro Real Rigidities: The Importance of Demand Shocks},
author = {S. Borağan Aruoba and Eugene Oue and Felipe Saffie and Jonathan L. Willis},
journal= {arXiv preprint arXiv:2608.02817},
year = {2026}
}