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Identifying the Influences of Nominal and Real Rigidities in Aggregate Price-Setting Behavior

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  • Andrew Levin
  • Günter Coenen

    ()
    (Directorate General Research European Central Bank)

Abstract

We formulate a generalized price-setting framework that incorporates staggered contracts of multiple durations and that enables us to directly identify the influences of nominal vs. real rigidities. Using German macroeconomic data over the period 1975Q1 through 1998Q4 to estimate this framework, we find that the data is well-characterized by a truncated Calvo-style distribution with an average duration of about two quarters. We also find that new contracts exhibit very low sensitivity to marginal cost, corresponding to a relatively high degree of real rigidity. Finally, our results indicate that backward-looking behavior is not needed to explain the aggregate data, at least in an environment with a stable monetary policy regime and a transparent and credible inflation objective

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 66.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:66

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Keywords: overlapping contracts; nominal rigidity; real rigidity; inflation persistence; simulation-based indirect inference;

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