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Multi-Sectoral Cascading and Price Dynamics - A Bayesian Econometric Evaluation

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Author Info

  • Alejandro Justiniano

    (Federal Reserve Board)

  • Michael Kumhof

    (International Monetary Fund)

  • Federico Ravenna

    (University of California, Santa Cruz)

Abstract

Recent evidence by Bils and Klenow (2004) and Klenow and Kryvstov (2003) shows that the average price duration for US CPI-basket goods is in the order of one to two quarters, challenging the monetary business cycle research to try and explain how short price durations can nevertheless generate a large degree of aggregate inflation persistence. We empirically test the relevance of a cascading structure of production as an explanation for short price durations and large aggregate inflation persistence. The final good is produced through a chain of intermediate goods, which undergo several processing stages. At each stage the price is set in nominal terms, and can be adjusted only at random intervals. Though each individual price is adjusted frequently, because the final good price embeds the intermediate price movements, it will turn out to have a large degree of stickiness. We estimate the model using Bayesian techniques to evaluate the relative role of indexation, pricing contracts length, and cascading production structure in the US postwar data. The estimation shows that short pricing contracts within the standard Calvo pricing mechanism are compatible with large inflation persistence, and inflation indexation turns out to play a much less relevant role - in other words, it ends up being a reduced-form model for the cascading production structure

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File URL: http://repec.org/sce2006/up.14115.1141153417.pdf
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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 422.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:422

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Related research

Keywords: Inflation Inertia; Monetary Policy; Bayesian Estimation; Multisectoral Cascading;

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  1. Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, MIT Press, vol. 123(3), pages 863-904, August.
  2. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  3. Jordi GalĂ­ & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Mikhail Golosov & Robert E. Lucas, 2003. "Menu Costs and Phillips Curves," NBER Working Papers 10187, National Bureau of Economic Research, Inc.
  5. Lawrence J. Christiano & Martin Eichenbaum & 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.
  6. Mark Bils & 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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Cited by:
  1. Imbs, Jean & Jondeau, Eric & Pelgrin, Florian, 2007. "Aggregating Phillips curves," Working Paper Series 0785, European Central Bank.
  2. Imbs, Jean & Jondeau, Eric & Pelgrin, Florian, 2011. "Sectoral Phillips curves and the aggregate Phillips curve," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 328-344.

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