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Evaluating the Fit of Sticky Price Models

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  • Matheron,J.
  • Maury, P-M.

Abstract

We examine the effects of introducing investment adjustment costs, variable capital utilization, indivisible labor, and material goods into a sticky price model subject to a cash-in-advance constraint. Combining these elements, the model overcomes the main criticisms traditionally addressed to this class of models. Under Watson (1993) goodness-of-fit criterion, the model does a very good job at replicating the dynamics of output, hours and investment. However, this framework dramatically fails at reproducing the spectrum of inflation. This unfortunate conclusion is robust to numerous alternative specifications.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 104.

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Length: 30 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:bfr:banfra:104

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Keywords: Sticky prices ; Spectral analysis;

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  1. Robert E. Lucas Jr. & Nancy L. Stokey, 1984. "Money and Interest in Cash-In-Advance Economy," Discussion Papers 628, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
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  4. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
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  11. Basu, S., 1993. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," Papers 93-23, Michigan - Center for Research on Economic & Social Theory.
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  14. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  15. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
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