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Estimating the Cross-sectional Distribution of Price Stickiness from Aggregate Data

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  • Niels Arne Dam

    (Danmarks Nationalbank)

  • Carlos Carvalho

    (Federal Reserve Bank of New York)

Abstract

We estimate sticky-price models for the U.S. economy in which the degree of price stickiness is allowed to vary across sectors. Perhaps surprisingly, we use only aggregate data on nominal and real output. In our models, identification of the cross-sectional distribution of price stickiness is made possible by the fact that different sectors are relatively more important in determining the response of aggregate variables to shocks at different frequencies. We find that the distribution of price stickiness inferred from aggregate data is strikingly similar to the distribution obtained from the recent empirical literature on microeconomic aspects of price setting in the U.S. economy. We also employ a Bayesian approach to combine time-series data on aggregate nominal and real output with such microeconomic information. Our results show that heterogeneity in price stickiness is of critical importance for understanding the joint dynamics of output and prices. Moreover, allowing for enough heterogeneity - in particular for prices in some sectors to last beyond one year - is crucial to avoid producing estimates that imply too little average nominal rigidity at the expense of too much real rigidity, relative to the specification of the model favored by the data.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 702.

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Date of creation: 2009
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Handle: RePEc:red:sed009:702

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  1. Sbordone, Argia, 1998. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Seminar Papers 653, Stockholm University, Institute for International Economic Studies.
  2. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
  3. Carvalho Carlos, 2006. "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-58, December.
  4. Kevin D. Sheedy, 2007. "Inflation Persistence When Price Stickiness Differs Between Industries," CEP Discussion Papers dp0838, Centre for Economic Performance, LSE.
  5. 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.
  6. Dixon, Huw & Kara, Engin, 2005. "Persistence and nominal inertia in a generalized Taylor economy: how longer contracts dominate shorter contracts," Working Paper Series 0489, European Central Bank.
  7. Carlos Carvalho & Fernanda Nechio, 2011. "Aggregation and the PPP Puzzle in a Sticky-Price Model," American Economic Review, American Economic Association, vol. 101(6), pages 2391-2424, October.
  8. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  9. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 183-203, April.
  10. Etienne Gagnon, 2009. "Price Setting During Low and High Inflation: Evidence from Mexico," The Quarterly Journal of Economics, MIT Press, vol. 124(3), pages 1221-1263, August.
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Cited by:
  1. BOUAKEZ, Hafedh & CARDIA, Emanuela & RUGE-MURCIA, Francisco J., 2009. "Sectoral Price Rigidity and Aggregate Dynamics," Cahiers de recherche 2009-01, Universite de Montreal, Departement de sciences economiques.
  2. Huw Dixon & Engin Kara, 2011. "Taking Multi-Sector Dynamic General Equilibrium Models to the Data," Koç University-TUSIAD Economic Research Forum Working Papers 1125, Koc University-TUSIAD Economic Research Forum.
  3. Stefano Eusepi & Bart Hobijn & Andrea Tambalotti, 2009. "CONDI: a cost-of-nominal-distortions index," Working Paper Series 2009-03, Federal Reserve Bank of San Francisco.
  4. Fang Yao, 2010. "Aggregate Hazard Function in Price-Setting: A Bayesian Analysis Using Macro Data," SFB 649 Discussion Papers SFB649DP2010-020, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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