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Reconciling microeconomic and macroeconomic estimates of price stickiness

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  • Cagliarini, Adam
  • Robinson, Tim
  • Tran, Allen

Abstract

This paper attempts to reconcile the high estimates of price stickiness from macroeconomic estimates of a New-Keynesian Phillips curve (NKPC) with the lower values obtained from surveys of firms' pricing behaviour. This microeconomic evidence also suggests that the frequency with which firms adjust their prices varies across sectors. Building on the insights of Carvalho (2006), we present Monte Carlo evidence that suggests that in the presence of this heterogeneity estimates of the NKPC obtained using conventional methods, such as GMM, are likely to considerably overstate the degree of aggregate price stickiness. Furthermore, if roundabout production is a characteristic of the economy the NKPC will falsely suggest that a sizeable fraction of prices are indexed to past inflation. These problems arise because of a type of misspecification and a lack of suitable instruments.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 33 (2011)
Issue (Month): 1 (March)
Pages: 102-120

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Handle: RePEc:eee:jmacro:v:33:y:2011:i:1:p:102-120

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Web page: http://www.elsevier.com/locate/inca/622617

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Keywords: New-Keynesian Phillips Curves Inflation Heterogeneity;

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References

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Cited by:
  1. Sean Langcake & Tim Robinson, 2013. "An Empirical BVAR-DSGE Model of the Australian Economy," RBA Research Discussion Papers rdp2013-07, Reserve Bank of Australia.
  2. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-88, March.
  3. Fröhling, Annette & Lommatzsch, Kirsten, 2011. "Output sensitivity of inflation in the euro area: Indirect evidence from disaggregated consumer prices," Discussion Paper Series 1: Economic Studies 2011,25, Deutsche Bundesbank, Research Centre.
  4. Millard, Stephen & O'Grady, Tom, 2012. "What do sticky and flexible prices tell us?," Bank of England working papers 457, Bank of England.

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