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What do sticky and flexible prices tell us?

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  • Millard, Stephen

    ()
    (Bank of England)

  • O'Grady, Tom

    ()
    (Massachusetts Institute of Technology)

Abstract

In 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 Info

Paper provided by Bank of England in its series Bank of England working papers with number 457.

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Length: 29 pages
Date of creation: 20 Jul 2012
Date of revision:
Handle: RePEc:boe:boeewp:0457

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Keywords: Flexible-price inflation; sticky-price inflation; heterogeneous price-setting;

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References

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  1. 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.
  2. Mirko Wiederholt & Emanuel Moench & Bartosz Maćkowiak, 2009. "Sectoral Price Data and Models of Price Setting," 2009 Meeting Papers 666, Society for Economic Dynamics.
  3. Huw Dixon & Engin Kara, 2007. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Discussion Papers 07-01, Department of Economics, University of Birmingham.
  4. Kevin D. Sheedy, 2007. "Inflation Persistence When Price Stickiness Differs Between Industries," CEP Discussion Papers dp0838, Centre for Economic Performance, LSE.
  5. Richard Mash, 2006. "Optimising Microfoundations for Inflation Persistence," Computing in Economics and Finance 2006 457, Society for Computational Economics.
  6. Huw D. Dixon & Hervé Le Bihan, 2010. "Generalized Taylor and Generalized Calvo Price and Wage-Setting: Micro Evidence with Macro Implications," CESifo Working Paper Series 3119, CESifo Group Munich.
  7. Philip Bunn & Colin Ellis, 2012. "How do Individual UK Producer Prices Behave?," Economic Journal, Royal Economic Society, vol. 122(558), pages F16-F34, 02.
  8. Kevin D. Sheedy, 2007. "Intrinsic Inflation Persistence," CEP Discussion Papers dp0837, Centre for Economic Performance, LSE.
  9. Altissimo, Filippo & Mojon, Benoit & Zaffaroni, Paolo, 2009. "Can aggregation explain the persistence of inflation?," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 231-241, March.
  10. Greenslade, Jennifer & Parker, Miles, 2010. "New insights into price-setting behaviour in the United Kingdom," Bank of England working papers 395, Bank of England.
  11. Kara Engin, 2011. "Micro-Data on Nominal Rigidity, Inflation Persistence and Optimal Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-19, July.
  12. Michael F. Bryan & Brent Meyer, 2010. "Are some prices in the CPI more forward looking than others? We think so," Economic Commentary, Federal Reserve Bank of Cleveland, issue May.
  13. Cagliarini, Adam & Robinson, Tim & Tran, Allen, 2011. "Reconciling microeconomic and macroeconomic estimates of price stickiness," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 102-120, March.
  14. Carvalho Carlos, 2006. "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-58, December.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Flexible-price inflation and monetary policy
    by Economic Logician in Economic Logic on 2012-08-10 14:25:00
  2. [??]??????????????????
    by himaginary in himaginaryの日記 on 2012-08-10 07:00:00
  3. The macroeconomic challenge
    by ? in Stumbling and Mumbling on 2014-02-19 14:07:00
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Cited by:
  1. Ádám Reiff & Judit Várhegyi, 2013. "Sticky Price Inflation Index: An Alternative Core Inflation Measure," MNB Working Papers 2013/2, Magyar Nemzeti Bank (the central bank of Hungary).
  2. 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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