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The Frequency Of Price Adjustment And New Keynesian Business Cycle Dynamics

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Richard Dennis ()

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Abstract

The Calvo pricing model that lies at the heart of many New Keynesian business cycle models has been roundly criticized for being inconsistent both with time series data on inflation and with micro-data on the frequency of price changes. In this paper I develop a new pricing model whose structure can be interpreted in terms of menu costs and infor- mation gathering/processing costs, that usefully addresses both criticisms. The resulting Phillips curve encompasses the partial-indexation model, the full-indexation model, and the Calvo model, and can speak to micro-data in ways that these models cannot. Taking the Phillips curve to the data, I ?nd that the share of ?rms that change prices each quar- ter is about 60 percent and, reflecting the importance of information gathering/processing costs, that most ?rms that change prices use indexation. Exploiting an isomorphism result, I show that these values are consistent with estimates implied by the partial-indexation model.

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Paper provided by Australian National University, Centre for Applied Macroeconomic Analysis in its series CAMA Working Papers with number 2008-19.

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Length: 36 pages
Date of creation: Apr 2008
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Handle: RePEc:acb:camaaa:2008-19

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Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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Cited by:
(explanations, 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.)

  1. Richard Dennis, 2007. "Fixing the New Keynesian Phillips Curve," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Nov 30. [Downloadable!]
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