What do sticky and flexible prices tell us?
AbstractIn this paper, we investigate the information content of prices in relatively sticky-price sectors versus relatively flexible-price sectors. We first present some empirical evidence that relatively flexible prices react more to deviations of output from trend than stickier prices and that sticky prices can tell us about firms’ inflation expectations. We then develop a simple DSGE model with a sticky-price sector and a flexible-price sector and use this model to show that these empirical results are exactly what you would actually expect to see, given standard economic theory. Taken together, the results of this paper suggest that calculations of ‘flexible-price’ inflation could, potentially, be used to provide monetary policy makers with a steer on the output gap, which is notoriously hard to measure, and that calculations of ‘sticky-price’ inflation could, potentially, be used to provide monetary policy makers with a steer on the medium-term inflation expectations of price-setters.
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Bibliographic InfoPaper provided by Bank of England in its series Bank of England working papers with number 457.
Length: 29 pages
Date of creation: 20 Jul 2012
Date of revision:
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Flexible-price inflation; sticky-price inflation; heterogeneous price-setting;
Find related papers by JEL classification:
- B30 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - General
- B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-29 (All new papers)
- NEP-DGE-2012-07-29 (Dynamic General Equilibrium)
- NEP-MAC-2012-07-29 (Macroeconomics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Flexible-price inflation and monetary policy
by Economic Logician in Economic Logic on 2012-08-10 14:25:00
by himaginary in himaginaryの日記 on 2012-08-10 07:00:00
- The macroeconomic challenge
by ? in Stumbling and Mumbling on 2014-02-19 14:07:00
- Choi, Chi-Young & O'Sullivan, Róisín, 2013. "Heterogeneous response of disaggregate inflation to monetary policy regime change: The role of price stickiness," Journal of Economic Dynamics and Control, Elsevier, vol. 37(9), pages 1814-1832.
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