Evaluating Models of Sticky Prices
AbstractCan variants of the classic Calvo (1983) model of sticky prices account for the statistical behavior of post-war US inflation? We develop and test versions of the model for which the answer to this question is yes. We then investigate whether these models imply plausible degrees of inertia in price setting behavior by firms. We find that they do, but only if we depart from two auxiliary assumptions made in standard expositions of the Calvo model. These assumptions are that monopolistically competitive firms face a constant elasticity of demand and capital can be instantaneously reallocated after a shock. When we modify these assumptions our model is consistent with the view that firms re-optimize prices, on average, once every two quarters
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 175.
Date of creation: 11 Nov 2005
Date of revision:
sticky prices; specific capital; inflation;
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- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
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