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Reconciling Microeconomic and Macroeconomic Estimates of Price Stickiness

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  • Adam Cagliarini

    (Reserve Bank of Australia)

  • Tim Robinson

    (Reserve Bank of Australia)

  • Allen Tran

    (Reserve Bank of Australia)

Abstract

This paper attempts to reconcile the high estimates of price stickiness from macroeconomic estimates of a New-Keynesian Phillips Curve (NKPC) with the lower values obtained from surveys of firms’ pricing behaviour. This microeconomic evidence also suggests that the frequency with which firms adjust their prices varies across sectors. The paper shows that in the presence of this heterogeneity, estimates of aggregate price stickiness from microeconomic and macroeconomic data should differ. Heterogeneity in firms’ pricing decisions, as well as a more realistic production structure, is introduced into an otherwise standard New-Keynesian model. Using a model calibrated with microeconomic pricing survey data for Australia, the paper shows that estimates of the NKPC considerably overstate the true degree of price stickiness and may falsely suggest that some prices are indexed to past inflation. These problems arise because of a type of misspecification and a lack of suitable instruments.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2010-01.

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Date of creation: Mar 2010
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Handle: RePEc:rba:rbardp:rdp2010-01

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Keywords: separate by New-Keynesian Phillips Curve; inflation;

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Cited by:
  1. Fröhling, Annette & Lommatzsch, Kirsten, 2011. "Output sensitivity of inflation in the euro area: Indirect evidence from disaggregated consumer prices," Discussion Paper Series 1: Economic Studies 2011,25, Deutsche Bundesbank, Research Centre.
  2. Millard, Stephen & O'Grady, Tom, 2012. "What do sticky and flexible prices tell us?," Bank of England working papers 457, Bank of England.
  3. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-88, March.
  4. Sean Langcake & Tim Robinson, 2013. "An Empirical BVAR-DSGE Model of the Australian Economy," RBA Research Discussion Papers rdp2013-07, Reserve Bank of Australia.

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