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Price Setting in a Model with Production Chains: Evidence from Sectoral Data

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  • Maral Shamloo

Abstract

Reconciling 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 Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/82.

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Length: 50
Date of creation: 01 Mar 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/82

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Related research

Keywords: Economic models; External shocks; Price adjustments; Price structures;

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Cited by:
  1. Hafedh Bouakez & Emanuela Cardia & Francisco J. Ruge-Murcia, 2009. "Sectoral Price Rigidity and Aggregate Dynamics," Cahiers de recherche 0906, CIRPEE.
  2. Jae Won Lee & Carlos Carvalho, 2010. "Sectoral Price Facts in a Sticky-Price Model," 2010 Meeting Papers 997, Society for Economic Dynamics.
  3. Paul Middleditch, 2010. "A New Keynesian Model with Heterogeneous Price Setting," Centre for Growth and Business Cycle Research Discussion Paper Series 150, Economics, The Univeristy of Manchester.

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