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A unified framework for understanding and comparing dynamic wage and price-setting models

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  • Dixon, H. D.

Abstract

This paper argues that the cross-sectional approach to durations is essential to understand nominal rigidity because this captures the fact that price-spells are generated by firms' price-setting behavior. Since the distribution of durations is dominated by a proliferation of short contracts, the cross-sectional measure corrects for this by length-biased sampling. Modelling the price-spell durations in this way enables us to see how Taylor, Calvo and their generalizations relate to each other, and enable us to compare price-setting behavior for a given distribution of durations. We also show how the micro-data can be directly related to the macroeconomic pricing models in this setting.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 257.

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Length: 45 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:bfr:banfra:257

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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: Price-spell; steady state; hazard rate; Calvo; Taylor.;

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  1. Álvarez, L. & Dias, D. & Dhyne, E. & Hoffmann, J. & Jonker, N. & Le Bihan, H. & Lünnemann, P. & Rumler, F. & Veronese, G. & Vilmunen, J., 2005. "Price Setting in the Euro Area: Some Stylized Facts from Individual Consumer Price Data," Working papers 136, Banque de France.
  2. Dixon, Huw & Kara, Engin, 2007. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Cardiff Economics Working Papers E2007/1, Cardiff University, Cardiff Business School, Economics Section.
  3. Richard Mash, 2006. "Optimising Microfoundations for Inflation Persistence," Computing in Economics and Finance 2006 457, Society for Computational Economics.
  4. Huw Dixon & Engin Kara, 2010. "Can We Explain Inflation Persistence in a Way that Is Consistent with the Microevidence on Nominal Rigidity?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 151-170, 02.
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  7. Huw Dixon & Engin Kara, . "How to Compare Taylor and Calvo Contracts: A Comment on Michael Kiley," Discussion Papers 05/04, Department of Economics, University of York.
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  22. Michael T. Kiley, 1999. "Partial adjustment and staggered price setting," Finance and Economics Discussion Series 1999-01, Board of Governors of the Federal Reserve System (U.S.).
  23. Richard Mash, 2003. "New Keynesian Microfoundations Revisited: A Calvo-Taylor-Rule-of-Thumb Model and Optimal Monetary Policy Delegation," Economics Series Working Papers 174, University of Oxford, Department of Economics.
  24. Luca Guerrieri, 2002. "The inflation persistence of staggered contracts," International Finance Discussion Papers 734, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Dixon, H. & Le Bihan, H., 2011. "Generalized Taylor and Generalized Calvo price and wage-setting: micro evidence with macro implications," Working papers 324, Banque de France.
  2. Dixon, Huw & Kara, Engin, 2006. "Understanding inflation persistence: a comparison of different models," Working Paper Series 0672, European Central Bank.

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