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Identifying the influences of nominal and real rigidities in aggregate price-setting behavior

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Author Info
Günter Coenen () (Corresponding author: Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.)
Andrew T. Levin () (Federal Reserve Board,Washington, DC 20551 USA)

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Abstract

We formulate a generalized price-setting framework that incorporates staggered contracts of multiple durations and that enables us to directly identify the influences of nominal vs. real rigidities. Using German macroeconomic data over the period 1975Q1 through 1998Q4 to estimate this framework, we find that the data is well-characterized by a truncated Calvostyle distribution with an average duration of about two quarters. We also find that new contracts exhibit very low sensitivity to marginal cost, corresponding to a relatively high degree of real rigidity. Finally, our results indicate that backward-looking behavior is not needed to explain the aggregate data, at least in an environment with a stable monetary policy regime and a transparent and credible inflation objective.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 418.

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Length: 47 pages
Date of creation: Nov 2004
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Handle: RePEc:ecb:ecbwps:20040418

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Related research
Keywords: Overlapping contracts; nominal rigidity; real rigidity; inflation persistence; simulation-based indirect inference.;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
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  3. Christopher J. Erceg and Andrew T. Levin, 2001. "Imperfect Credibility and Inflation Persistence," Computing in Economics and Finance 2001 19, Society for Computational Economics.
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  6. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
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