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Pricing Models: A Bayesian DSGE Approach for the U.S. Economy

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JEAN-PHILIPPE LAFORTE

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Abstract

This paper compares and estimates three pricing mechanisms in the context of a small DSGE model of the U.S. economy. We interpret our results as favoring the pricing mechanism presented in Wolman (1999 Wolman model) over the New Keynesian model with indexation (Gali and Gertler 1999, Smets and Wouters 2004a) and the sticky information model of Mankiw and Reis (2002). The key factor that explains the performance of the Wolman model is that the data reject the key assumption of the New Keynesian model that the firm's probability of price change is constant over time and independent of the contract's vintage. Our results also show that incorporating indexation in the New Keynesian model represents a poor expedient in matching the autocorrelation function of the inflation process over the last 20 years. Copyright 2007 The Ohio State University.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2007.00018.x
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): s1 (02)
Pages: 127-154
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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:s1:p:127-154

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  1. Michael T. Kiley, 2006. "A quantitative comparison of sticky-price and sticky-information models of price setting," Finance and Economics Discussion Series 2006-45, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  2. Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2008. "Inflation Target Shocks and Monetary Policy Inertia in the Euro Area," IDEI Working Papers 515, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  3. Rochelle M. Edge & Michael T. Kiley & Jean-Philippe Laforte, 2007. "Documentation of the Research and Statistics Division’s estimated DSGE model of the U.S. economy: 2006 version," Finance and Economics Discussion Series 2007-53, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Ricardo Reis, 2008. "A Sticky-Information General Equilibrium Model for Policy Analysis," Working Papers Central Bank of Chile 495, Central Bank of Chile. [Downloadable!]
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  5. Jonas Dovern & Joerg Doepke & Ulrich Fritsche & Jirka Slacalek, 2006. "Sticky Information Phillips Curves: European Evidence," Macroeconomics and Finance Series 200604, Hamburg University, Department Wirtschaft und Politik. [Downloadable!]
    Other versions:
  6. Paustian, Matthias & von Hagen, Jürgen, 2008. "The Role of Contracting Schemes for Assessing the Welfare Costs of Nominal Rigidities," CEPR Discussion Papers 6726, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Oleg Korenok & Stanislav Radchenko & Norman R. Swanson, 2006. "International Evidence on the Efficacy of new-Keynesian Models of Inflation Persistence," Working Papers 0602, VCU School of Business, Department of Economics. [Downloadable!]
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  8. Rochelle M. Edge & Michael T. Kiley & Jean-Philippe Laforte, 2008. "A Comparison Of Forecast Performance Between Federal Reserve Staff Forecasts, Simple Reduced-Form Models, And A Dsge Model," CAMA Working Papers 2009-03, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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  9. George Bratsiotis & Wayne Robinson, 2009. "Non-Labor Unit Costs, Marginal Costs and the New Keynesian Phillips Curve," Centre for Growth and Business Cycle Research Discussion Paper Series 123, Economics, The Univeristy of Manchester. [Downloadable!]
  10. Olivier Coibion & Yuriy Gorodnichenko, 2008. "Strategic Interaction Among Heterogeneous Price-Setters In An Estimated DSGE Model," NBER Working Papers 14323, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Bruchez, Pierre-Alain, 2007. "A Hybrid Sticky-Price and Sticky-Information Model," MPRA Paper 3540, University Library of Munich, Germany. [Downloadable!]
  12. Rochelle M. Edge & Michael T. Kiley & Jean-Philippe Laforte, 2007. "Natural rate measures in an estimated DSGE model of the U.S. economy," Finance and Economics Discussion Series 2007-08, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
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