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Is Rotemberg pricing justified by macro data?

Author

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  • Richter, Alexander W.
  • Throckmorton, Nathaniel A.

Abstract

Structural models used to study monetary policy often include sticky prices. Calvo pricing is more common but Rotemberg pricing has become popular due to its computational advantage. To determine whether the data supports that change, we estimate a nonlinear New Keynesian model with a zero lower bound (ZLB) constraint and each type of sticky prices. The models produce similar parameter estimates and the filtered shocks are nearly identical when the Fed was not constrained, but the Rotemberg model has a higher marginal data density and it endogenously generates more volatility at the ZLB, which helps explain data from 2008–2011.

Suggested Citation

  • Richter, Alexander W. & Throckmorton, Nathaniel A., 2016. "Is Rotemberg pricing justified by macro data?," Economics Letters, Elsevier, vol. 149(C), pages 44-48.
  • Handle: RePEc:eee:ecolet:v:149:y:2016:i:c:p:44-48
    DOI: 10.1016/j.econlet.2016.10.011
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    References listed on IDEAS

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    1. Fernández-Villaverde, Jesús & Gordon, Grey & Guerrón-Quintana, Pablo & Rubio-Ramírez, Juan F., 2015. "Nonlinear adventures at the zero lower bound," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 182-204.
    2. Lombardo, Giovanni & Vestin, David, 2008. "Welfare implications of Calvo vs. Rotemberg-pricing assumptions," Economics Letters, Elsevier, vol. 100(2), pages 275-279, August.
    3. Taisuke Nakata, 2017. "Optimal Government Spending at the Zero Lower Bound: A Non-Ricardian Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 150-169, January.
    4. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
    5. Taisuke Nakata, 2017. "Optimal Government Spending at the Zero Lower Bound: A Non-Ricardian Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 150-169, January.
    6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    7. Ascari, Guido & Castelnuovo, Efrem & Rossi, Lorenza, 2011. "Calvo vs. Rotemberg in a trend inflation world: An empirical investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1852-1867.
    8. Lilia Maliar & Serguei Maliar, 2015. "Merging simulation and projection approaches to solve high‐dimensional problems with an application to a new Keynesian model," Quantitative Economics, Econometric Society, vol. 6(1), pages 1-47, March.
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    Citations

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    Cited by:

    1. Sims, Eric & Wolff, Jonathan, 2017. "State-dependent fiscal multipliers: Calvo vs. Rotemberg," Economics Letters, Elsevier, vol. 159(C), pages 190-194.
    2. Atkinson, Tyler & Richter, Alexander W. & Throckmorton, Nathaniel A., 2020. "The zero lower bound and estimation accuracy," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 249-264.
    3. Yasuo Hirose & Takeki Sunakawa, 2017. "The natural rate of interest in a nonlinear DSGE model," CAMA Working Papers 2017-38, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Joonseok Oh, 2020. "The Propagation Of Uncertainty Shocks: Rotemberg Versus Calvo," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(3), pages 1097-1113, August.
    5. Hirose, Yasuo, 2020. "An Estimated Dsge Model With A Deflation Steady State," Macroeconomic Dynamics, Cambridge University Press, vol. 24(5), pages 1151-1185, July.
    6. Hills, Timothy S. & Nakata, Taisuke & Schmidt, Sebastian, 2019. "Effective lower bound risk," European Economic Review, Elsevier, vol. 120(C).
    7. Born, Benjamin & Pfeifer, Johannes, 2020. "The New Keynesian Wage Phillips Curve: Calvo Vs. Rotemberg," Macroeconomic Dynamics, Cambridge University Press, vol. 24(5), pages 1017-1041, July.
    8. OH, Joonseok, 2019. "The propagation of uncertainty shocks : Rotemberg vs. Calvo," Economics Working Papers ECO 2019/01, European University Institute.

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    More about this item

    Keywords

    Bayesian estimation; Calvo pricing; Rotemberg pricing; Zero lower bound;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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