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A New Keynesian Model with Heterogeneous Price Setting

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  • Paul Middleditch

Abstract

The Calvo contract pricing mechanism has become the most widely accepted microfoundation to the NK Phillips curve but unfortunately predicts that all firms in the economy face the same probability of price change. To better explain the stylized fact this paper relaxes the homogeneous firm assumption in the Calvo contract, to provide a macroeconomic explanation more consistent with recently available microeconomic evidence that suggests firms face differing probabilities of price change. A simple New Keynesian dynamic stochastic general equilibrium (DSGE) model with nominal rigidities and habit in consumption for the US is estimated using Bayesian techniques and finds evidence of a flexible price sector of around 6% and a sticky price sector of between 55% and 70% depending on model specification.

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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 150.

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Length: 49 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:man:cgbcrp:150

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  1. Paul Levine & Joseph Pearlman & Bo Yang, 2008. "The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott," Review of International Economics, Wiley Blackwell, vol. 16(4), pages 728-746, 09.
  2. Luis J. Álvarez & Pablo Burriel & Ignacio Hernando, 2005. "Do decreasing hazard functions for price changes make any sense?," Banco de Espa�a Working Papers 0508, Banco de Espa�a.
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  1. Price rigidity all wrong
    by Economic Logician in Economic Logic on 2010-11-29 15:35:00

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