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Reassessing price adjustment costs in DSGE models

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  • Sienknecht, Sebastian

Abstract

Indexation theories have become standard for inflation persistence in DSGE models (Smets and Wouters (2003, 2007)). However, these theories overlook an important stylized fact of U.S. business cycles: high fluctuations in the first difference of inflation. I find that this pattern can be captured by adjustment costs precisely from the first difference of inflation (Pesaran (1991) labels this difference as a "speed change"). I estimate four DSGE models differing in their rigidity assumption and find that a framework with inflation-based adjustment costs has the highest probability to fit U.S. data.

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  • Sienknecht, Sebastian, 2016. "Reassessing price adjustment costs in DSGE models," MPRA Paper 73763, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:73763
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    More about this item

    Keywords

    Phillips curve; Economic fluctuations; Estimation.;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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