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Firm-Specific Production Factors in a DSGE Model with Taylor Price Setting

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Gregory de Walque
Frank Smets
Rafael Wouters

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Abstract

Using Bayesian likelihood methods, this paper estimates a dynamic stochastic general equilibrium model with Taylor contracts and firm-specific factors in the goods market on euro-area data. The paper shows how the introduction of firmspecific factors improves the empirical fit of the model and reduces the estimated contract length to a duration of four quarters, which is more consistent with the empirical evidence on average price durations in the euro area. However, in order to obtain this result, the estimated real rigidity is very large, either in the form of a very large constant elasticity of substitution between goods or in the form of an endogenous elasticity of substitution that is very sensitive to the relative price. Finally, the paper also investigates the implications of these estimates for the distribution of prices and quantities across the various goods sectors.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 2 (2006)
Issue (Month): 3 (September)
Pages:
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Handle: RePEc:ijc:ijcjou:y:2006:q:3:a:4

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Find related papers by JEL classification:
E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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  2. John B. Taylor, 1980. "Aggregate Dynamics and Staggered Contracts," NBER Reprints 0126, National Bureau of Economic Research, Inc.
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  3. Danthine, Jean-Pierre & Donaldson, John B, 2002. "A Note on NNS Models: Introducing Physical Capital; Avoiding Rationing," CEPR Discussion Papers 3351, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09. [Downloadable!] (restricted)
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  5. Karl Whelan, 2004. "Staggered price contracts and inflation persistence: some general results," Working Paper Series 417, European Central Bank. [Downloadable!]
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  6. Mark Bils and Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
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  7. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270. [Downloadable!] (restricted)
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  8. Andrew Levin & Günter Coenen, 2005. "Identifying the Influences of Nominal and Real Rigidities in Aggregate Price-Setting Behavior," Computing in Economics and Finance 2005 66, Society for Computational Economics.
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  9. Engin Kara & Huw Dixon, 2005. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Computing in Economics and Finance 2005 87, Society for Computational Economics. [Downloadable!]
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  10. Gabriel Fagan & Jérôme Henry & Ricardo Mestre, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank. [Downloadable!]
  11. Altig, David E & Christiano, Lawrence J. & Eichenbaum, Martin & Lindé, Jesper, 2005. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," CEPR Discussion Papers 4858, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, vol. 22(1), pages 39-59, January. [Downloadable!] (restricted)
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  14. Lawrence J. Christiano, Martin Eichenbaum, and Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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  15. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October. [Downloadable!] (restricted)
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Cited by:
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  1. M. Dossche & F. Heylen & D. Van Den Poel, 2006. "The Kinked Demand Curve and Price Rigidity : Evidence from Scanner Data," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 06/429, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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