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Estimating the cross-sectional distribution of price stickiness from aggregate data

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  • Carlos Carvalho
  • Niels Arne Dam

Abstract

We estimate a multisector sticky-price model for the U.S. economy in which the degree of price stickiness is allowed to vary across sectors. For this purpose, we use a specification that allows us to extract information about the underlying cross-sectional distribution from aggregate data. Identification is possible because sectors play different roles in determining the response of aggregate variables to shocks at different frequencies: Sectors where prices are stickier are relatively more important in determining the low-frequency response. Estimating the model using only aggregate data on nominal and real output, we find that the inferred distribution of price stickiness is strikingly similar to the empirical distribution constructed from the recent microeconomic evidence on price setting in the U.S. economy. We also provide macro-based estimates of the underlying distribution for ten other countries. Finally, we explore our Bayesian approach to combine the aggregate time-series data with the microeconomic information on the distribution of price rigidity. Our results show that allowing for this type of heterogeneity is critically important to understanding the joint dynamics of output and prices, and it constitutes a step toward reconciling the extent of nominal price rigidity implied by aggregate data with the evidence from microeconomic data on price stickiness.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 419.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:419

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Keywords: Prices ; Bayesian statistical decision theory ; Time-series analysis;

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References

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  1. Etienne Gagnon, 2006. "Price Setting during Low and High Inflation: Evidence from Mexico," 2006 Meeting Papers 300, Society for Economic Dynamics.
  2. Engin Kara & Huw Dixon, 2005. "Persistence and Nominal Inertia in a Generalised Taylor Economy: How Loner Contracts Dominate Shorter Contracts," Money Macro and Finance (MMF) Research Group Conference 2005 82, Money Macro and Finance Research Group.
  3. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers 653, Stockholm - International Economic Studies.
  4. Carlos Carvalho & Fernanda Nechio, 2011. "Aggregation and the PPP Puzzle in a Sticky-Price Model," American Economic Review, American Economic Association, vol. 101(6), pages 2391-2424, October.
  5. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 183-203, April.
  6. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
  7. 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.
  8. Kevin D. Sheedy, 2007. "Inflation persistence when price stickiness differs between industries," LSE Research Online Documents on Economics 3738, London School of Economics and Political Science, LSE Library.
  9. Coenen, Günter & Levin, Andrew T., 2004. "Identifying the influences of nominal and real rigidities in aggregate price-setting behavior," Working Paper Series 0418, European Central Bank.
  10. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
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Cited by:
  1. Stefano Eusepi & Bart Hobijn & Andrea Tambalotti, 2009. "CONDI: a cost-of-nominal-distortions index," Working Paper Series 2009-03, Federal Reserve Bank of San Francisco.
  2. Huw Dixon & Engin Kara, 2011. "Taking Multi-Sector Dynamic General Equilibrium Models to the Data," Bristol Economics Discussion Papers 11/621, Department of Economics, University of Bristol, UK.
  3. BOUAKEZ, Hafedh & CARDIA, Emanuela & RUGE-MURCIA, Francisco J., 2009. "Sectoral Price Rigidity and Aggregate Dynamics," Cahiers de recherche 2009-01, Universite de Montreal, Departement de sciences economiques.
  4. Fang Yao, 2010. "Aggregate Hazard Function in Price-Setting: A Bayesian Analysis Using Macro Data," SFB 649 Discussion Papers SFB649DP2010-020, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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