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Microeconomic Rigidities and Aggregate Price Dynamics

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  • Ricardo J. Caballero
  • Eduardo M.R.A. Engel

Abstract

This paper is an attempt to enrich the characterization of the sluggish behavior of the aggregate price level. Our contribution to this vast literature is to explicitly consider microeconomic heterogeneity and its interaction with nonlinear microeconomic price adjustment policies. The model we propose outperforms the constant-probability-of-adjustment/partial- adjustment model in describing the path of postwar U.S. inflation. Using only aggregate data, we infer that the probability that a firm adjusts its price depends on the sign and the magnitude of the deviation of the price from its target level. At the aggregate level we find that the aggregate price responds less to negative shocks than to positive shocks, that the size of this asymmetry increases with the size of the shock, and that the number of firms changing their prices - and therefore the flexibility of the price level to aggregate shocks - varies endogenously over time in response to changes in economic conditions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4162.

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Date of creation: Sep 1992
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Publication status: published as European Economic Review, 37 (4), 1993, 697-711.
Handle: RePEc:nbr:nberwo:4162

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References

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  1. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  2. Julio Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116 National Bureau of Economic Research, Inc.
  3. Caballero, Ricardo J, 1994. "Small Sample Bias and Adjustment Costs," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 52-58, February.
  4. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1992. "Price Rigidities, Asymmetries, and Output Fluctuations," NBER Working Papers 4091, National Bureau of Economic Research, Inc.
  5. Caballero, Ricardo J & Engel, Eduardo M R A, 1992. "Beyond the Partial-Adjustment Model," American Economic Review, American Economic Association, vol. 82(2), pages 360-64, May.
  6. repec:nbr:nberre:0126 is not listed on IDEAS
  7. Gordon, Robert J, 1984. "The Short-Run Demand for Money: A Reconsideration," CEPR Discussion Papers 24, C.E.P.R. Discussion Papers.
  8. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1991. "Dynamic (S,s) Economies," NBER Working Papers 3734, National Bureau of Economic Research, Inc.
  9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  10. Gordon, Robert J, 1981. "Output Fluctuations and Gradual Price Adjustment," Journal of Economic Literature, American Economic Association, vol. 19(2), pages 493-530, June.
  11. Ricardo J. Caballero, 1991. "A Fallacy of Composition," NBER Working Papers 3735, National Bureau of Economic Research, Inc.
  12. de Menil, George, 1974. "Aggregate Price Dynamics," The Review of Economics and Statistics, MIT Press, vol. 56(2), pages 129-40, May.
  13. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1992. "Microeconomic Adjustment Hazards and Aggregate Dynamics," NBER Working Papers 4090, National Bureau of Economic Research, Inc.
  14. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  15. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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