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Using Micro Data on Prices to Improve Business Cycle Models

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  • Engin Kara

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    Abstract

    I embed the pricing model proposed by Dixon and Kara (2011a, b) (i.e. a Generalized Taylor Economy (GTE)) into a state of the art instance of New Keynesian economics (e.g. Christiano, Eichenbaum and Evans (2005) and Smets and Wouters (2007)). The GTE is built to account for one of the most important features of the data: hetero- geneity in price spells. I estimate the resulting model for the US using Bayesian methods. The new model matches key features of micro and macro data that would otherwise have been elusive.

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    File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp12632.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 12/632.

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    Length: 29 pages
    Date of creation: Nov 2012
    Date of revision:
    Handle: RePEc:bri:uobdis:12/632

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    Keywords: DSGE models; reset inflation; GTE; Calvo.;

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    1. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, Elsevier, vol. 46(2), pages 281-313, October.
    2. Carvalho Carlos, 2006. "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 6(3), pages 1-58, December.
    3. Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Working Papers, Bank of Canada 05-4, Bank of Canada.
    4. Kara, Engin, 2006. "Optimal monetary policy in the generalized Taylor economy," Working Paper Series, European Central Bank 0673, European Central Bank.
    5. Emi Nakamura & Jón Steinsson, 2008. "Monetary Non-Neutrality in a Multi-Sector Menu Cost Model," NBER Working Papers 14001, National Bureau of Economic Research, Inc.
    6. Pete Klenow & Ben Malin & Mark Bils, 2010. "Reset Price Inflation and the Impact of Monetary Policy Shocks," 2010 Meeting Papers, Society for Economic Dynamics 1079, Society for Economic Dynamics.
    7. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(4), pages 1241-77, November.
    8. Huw Dixon & Engin Kara, . "How to Compare Taylor and Calvo Contracts: A Comment on Michael Kiley," Discussion Papers, Department of Economics, University of York 05/04, Department of Economics, University of York.
    9. Dhyne, Emmanuel & Álvarez, Luis J. & Le Bihan, Hervé & Veronese, Giovanni & Dias, Daniel & Hoffmann, Johannes & Jonker, Nicole & Lünnemann, Patrick & Rumler, Fabio & Vilmunen, Jouko, 2005. "Price setting in the euro area: some stylized facts from individual consumer price data," Working Paper Series, European Central Bank 0524, European Central Bank.
    10. repec:ecj:econjl:v:122:y:2012:i::p:532-554 is not listed on IDEAS
    11. Andrew Levin & Günter Coenen, 2005. "Identifying the Influences of Nominal and Real Rigidities in Aggregate Price-Setting Behavior," Computing in Economics and Finance 2005, Society for Computational Economics 66, Society for Computational Economics.
    12. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, American Economic Association, vol. 97(3), pages 586-606, June.
    13. 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, CESifo Group Munich 3119, CESifo Group Munich.
    14. 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, Blackwell Publishing, vol. 42(1), pages 151-170, 02.
    15. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, Elsevier, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284 Elsevier.
    16. Dixon, Huw & Kara, Engin, 2011. "Contract length heterogeneity and the persistence of monetary shocks in a dynamic generalized Taylor economy," European Economic Review, Elsevier, Elsevier, vol. 55(2), pages 280-292, February.
    17. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1415-1464, November.
    18. Martin Eichenbaum & Jonas D.M. Fisher, 2003. "Evaluating the Calvo model of sticky prices," Working Paper Series, Federal Reserve Bank of Chicago WP-03-23, Federal Reserve Bank of Chicago.
    19. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(5), pages 947-985, October.
    20. Carlos Carvalho, 2005. "Heterogeneity in Price Setting and the Real Effects of Monetary Shocks," Macroeconomics, EconWPA 0509017, EconWPA, revised 12 Sep 2005.
    21. Philip Bunn & Colin Ellis, 2012. "Examining The Behaviour Of Individual UK Consumer Prices," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 122(558), pages F35-F55, 02.
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