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Generalized Taylor and Generalized Calvo Price and Wage-Setting: Micro Evidence with Macro Implications

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  • Huw D. Dixon
  • Hervé Le Bihan

Abstract

The Generalized Calvo and the Generalized Taylor model of price and wage-setting are, unlike the standard Calvo and Taylor counter-parts, exactly consistent with the distribution of durations observed in the data. Using price and wage micro-data from a major euro-area economy (France), we develop calibrated versions of these models. We assess the consequences for monetary policy transmission by embedding these calibrated models in a standard DSGE model. The Generalized Taylor model is found to help rationalizing the hump-shaped response of inflation, without resorting to the counterfactual assumption of systematic wage and price indexation.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3119.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3119

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Keywords: contract length; steady state; hazard rate; Calvo; Taylor; wage-setting; price-setting;

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References

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  1. Guido Ascari, 2004. "Staggered Prices and Trend Inflation: Some Nuisances," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 642-667, July.
  2. Dixon, Huw & Kara, Engin, 2006. "How to Compare Taylor and Calvo Contracts: A Comment on Michael Kiley," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(4), pages 1119-1126, June.
  3. Rochelle M. Edge, 2002. "The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 559-585, July.
  4. Ascari, Guido, 2000. "Optimising Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(465), pages 664-86, July.
  5. Avouyi-Dovi, Sanvi & Fougère, Denis & Gautier, Erwan, 2010. "Wage Rigidity, Collective Bargaining and the Minimum Wage: Evidence from French Agreement Data," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7932, C.E.P.R. Discussion Papers.
  6. Fougere, Denis & Le Bihan, Herve & Sevestre, Patrick, 2007. "Heterogeneity in Consumer Price Stickiness: A Microeconometric Investigation," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 25, pages 247-264, July.
  7. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1922, Harvard - Institute of Economic Research.
  8. de Walque, Gregory & Smets, Frank & Wouters, Raf, 2006. "Firm-specific production factors in a DSGE model with Taylor price setting," Working Paper Series, European Central Bank 0648, European Central Bank.
  9. Luis J. Álvarez & Pablo Burriel & Ignacio Hernando, 2005. "Do decreasing hazard functions for price changes make any sense?," Banco de Espa�a Working Papers, Banco de Espa�a 0508, Banco de Espa�a.
  10. Dixon, Huw David & Kara, Engin, 2008. "Can we explain inflation persistence in a way that is consistent with the micro-evidence on nominal rigidity?," Cardiff Economics Working Papers E2008/22, Cardiff University, Cardiff Business School, Economics Section.
  11. Guerrieri, Luca, 2006. "The Inflation Persistence of Staggered Contracts," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(2), pages 483-494, March.
  12. Günes Kamber & Stephen Millard, 2012. "Using Estimated Models to Assess Nominal and Real Rigidities in the United Kingdom," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 8(4), pages 97-119, December.
  13. Alexander L. Wolman, 1999. "Sticky prices, marginal cost, and the behavior of inflation," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Fall, pages 29-48.
  14. 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.
  15. Juillard, Michel, 1996. "Dynare : a program for the resolution and simulation of dynamic models with forward variables through the use of a relaxation algorithm," CEPREMAP Working Papers (Couverture Orange) 9602, CEPREMAP.
  16. Heckel, T. & Le Bihan, H. & Montornès, J., 2008. "Sticky Wages. Evidence from Quarterly Microeconomic Data," Working papers, Banque de France 208, Banque de France.
  17. Laurent Baudry & Hervé Le Bihan & Patrick Sevestre & Sylvie Tarrieu, 2007. "What do Thirteen Million Price Records have to Say about Consumer Price Rigidity?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 69(2), pages 139-183, 04.
  18. Kara, Engin, 2006. "Optimal monetary policy in the generalized Taylor economy," Working Paper Series, European Central Bank 0673, European Central Bank.
  19. 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.
  20. 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.
  21. 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.
  22. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999, Society for Computational Economics 1151, Society for Computational Economics.
  23. Guido Ascari, 2003. "Price/Wage Staggering and Persistence: A Unifying Framework," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 17(4), pages 511-540, 09.
  24. Dixon, Huw David, 2009. "A unified framework for understanding and comparing dynamic wage and price setting models," Cardiff Economics Working Papers E2009/20, Cardiff University, Cardiff Business School, Economics Section.
  25. Carlos Carvalho, 2005. "Heterogeneity in Price Setting and the Real Effects of Monetary Shocks," Macroeconomics, EconWPA 0509017, EconWPA, revised 12 Sep 2005.
  26. Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 20(2), pages 171-192, Spring.
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Citations

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Cited by:
  1. Millard, Stephen & O'Grady, Tom, 2012. "What do sticky and flexible prices tell us?," Bank of England working papers, Bank of England 457, Bank of England.
  2. Dixon, Huw & Seaton, Jonathan & Waterson, Michael, 2014. "Price Flexibility In British Supermarkets: Moderation And Recession," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 1041, University of Warwick, Department of Economics.
  3. Dixon, Huw David & Kara, Engin, 2012. "Taking Multi-Sector Dynamic General Equilibrium Models to the Data," Cardiff Economics Working Papers E2012/8, Cardiff University, Cardiff Business School, Economics Section.
  4. Dixon, Huw & Franklin, Jeremy & Millard, Stephen, 2014. "Sectoral shocks and monetary policy in the United Kingdom," Bank of England working papers, Bank of England 499, Bank of England.
  5. Engin Kara, 2012. "Using Micro Data on Prices to Improve Business Cycle Models," Bristol Economics Discussion Papers 12/632, Department of Economics, University of Bristol, UK.

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