Price Setting in a Model with Production Chains
AbstractReconciling the high frequency of price changes at the micro level and their apparent rigidity at the aggregate level has been the subject of considerable debate in macroeconomics recently. In this paper I show that incorporating production chains in a standard New- Keynesian model replicates two stylized facts about the data. First, sectoral prices respond with significantly different speeds to aggregate shocks. Meanwhile, the responses to sectorspecific shocks are similar. Second, the standard price setting models are unable to quantitatively match the amount of monetary non-neutrality observed in the data. I argue, First, that the input-output linkages in production generate different responses to aggregate shocks across sectors. Second, calibrating this model to the US data can create five times more monetary non-neutrality in response to nominal shocks compared to an equivalent homogeneous economy with intermediate inputs. Finally, the model implies that upstream industries respond faster to aggregate shocks compared to downstream industries. I show that this prediction is supported by the data.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 10/82.
Date of creation: 01 Mar 2010
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- NEP-ALL-2010-05-02 (All new papers)
- NEP-CBA-2010-05-02 (Central Banking)
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- 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.
- Hafedh Bouakez & Emanuela Cardia & Francisco J. Ruge-Murcia, 2009. "Sectoral Price Rigidity and Aggregate Dynamics," Cahiers de recherche 0906, CIRPEE.
- BOUAKEZ, Hafedh & CARDIA, Emanuela & RUGE-MURCIA, Francisco J., 2009. "Sectoral Price Rigidity and Aggregate Dynamics," Cahiers de recherche 01-2009, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Carlos Carvalho & Jae Won Lee, 2011.
"Sectoral Price Facts in a Sticky-Price Model,"
Departmental Working Papers
201133, Rutgers University, Department of Economics.
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