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Firm-Specific Production Factors in a DSGE Model with Taylor Price Setting

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Author Info
de Walque, Gregory
Smets, Frank
Wouters, Rafael

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Abstract

Using Bayesian likelihood methods, this paper estimates a dynamic stochastic general equilibrium model with Taylor contracts and firm-specific factors in the goods market on euro-area data. The paper shows how the introduction of firmspecific factors improves the empirical fit of the model and reduces the estimated contract length to a duration of four quarters, which is more consistent with the empirical evidence on average price durations in the euro area. However, in order to obtain this result, the estimated real rigidity is very large, either in the form of a very large constant elasticity of substitution between goods or in the form of an endogenous elasticity of substitution that is very sensitive to the relative price. Finally, the paper also investigates the implications of these estimates for the distribution of prices and quantities across the various goods sectors.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 810.

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Date of creation: 30 Jun 2006
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Publication status: Published in International Journal of Central Banking Number 3.Volume 2(2006): pp. 107-154
Handle: RePEc:pra:mprapa:810

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G00 - Financial Economics - - General - - - General
G0 - Financial Economics - - General

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. John B. Taylor, 1980. "Aggregate Dynamics and Staggered Contracts," NBER Reprints 0126, National Bureau of Economic Research, Inc.
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  2. Ignazio Angelloni & Luc Aucremanne & Michael Ehrmann & Jordi Galí & Andrew Levin & Frank Smets, 2005. "New Evidence on Inflation Persistence and Price Stickiness in the Euro Area: Implications for Macro Modelling," Economics Working Papers 910, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  3. Mark Bils and Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
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  4. Filippo Altissimo & Michael Ehrmann & Frank Smets, 2006. "Inflation persistence and price-setting behaviour in the euro area – a summary of the IPN evidence," Occasional Paper Series 46, European Central Bank. [Downloadable!]
  5. Engin Kara & Huw Dixon, 2005. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Computing in Economics and Finance 2005 87, Society for Computational Economics. [Downloadable!]
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  6. Martin Eichenbaum & Jonas D.M. Fisher, 2004. "Evaluating the Calvo Model of Sticky Prices," NBER Working Papers 10617, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Jean-Pierre DANTHINE & John B. DONALDSON, 2002. "A Note on NNS Models: Introducing Physical Capital; Avoiding Rationing," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 02.04, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
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  8. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April. [Downloadable!] (restricted)
  9. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, vol. 22(1), pages 39-59, January. [Downloadable!] (restricted)
  10. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March. [Downloadable!] (restricted)
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  11. Raf Wouters & Frank Smets, 2005. "Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 161-183. [Downloadable!]
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  12. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October. [Downloadable!] (restricted)
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  13. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-77, November. [Downloadable!] (restricted)
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  14. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09. [Downloadable!] (restricted)
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  15. Karl Whelan, 2004. "Staggered price contracts and inflation persistence: some general results," Working Paper Series 417, European Central Bank. [Downloadable!]
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  16. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270. [Downloadable!] (restricted)
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  17. Andrew Levin & Günter Coenen, 2005. "Identifying the Influences of Nominal and Real Rigidities in Aggregate Price-Setting Behavior," Computing in Economics and Finance 2005 66, Society for Computational Economics.
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  18. Gabriel Fagan & Jérôme Henry & Ricardo Mestre, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank. [Downloadable!]
  19. Luc Aucremanne & Emmanuel Dhyne, 2004. "How frequently do prices change? Evidence based on the micro data underlying the Belgian CPI," Research series 200404-1, National Bank of Belgium. [Downloadable!]
  20. Luc Aucremanne & Emmanuel Dhyne, 2004. "How frequently do prices change? Evidence based on the micro data underlying the Belgian CPI," Working Paper Series 331, European Central Bank. [Downloadable!]
  21. Altig, David E & Christiano, Lawrence J. & Eichenbaum, Martin & Lindé, Jesper, 2005. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," CEPR Discussion Papers 4858, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  22. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
  23. Lawrence J. Christiano, Martin Eichenbaum, and Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. FÈVE, Patrick & MATHERON, Julien & SAHUC, Jean-Guillaume, 2008. "Inflation Target Shocks and Monetary Policy Inertia in the Euro Area," IDEI Working Papers 515, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  2. M. Dossche & F. Heylen & D. Van Den Poel, 2006. "The Kinked Demand Curve and Price Rigidity : Evidence from Scanner Data," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 06/429, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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