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Sticky-Price Models and the Natural Rate Hypothesis

  • Javier Andrés

    ()

    (Banco de España
    Universidad de Valencia)

  • David López-Salido

    ()

    (Banco de España)

  • Edward Nelson

    ()

    (Federal Reserve Bank of St. Louis)

A major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state. In this paper we estimate a dynamic optimizing business cycle model whose price-setting behavior satisfies the natural rate hypothesis. The priceadjustment specifications we consider are the sticky-information specification of Mankiw and Reis (2002) and the indexed contracts of Christiano, Eichenbaum, and Evans (2005). Our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen. Consequently, the alternative model specifications deliver similar estimates of the U.S. output gap series, but the empirical behavior of the gap series differs substantially from standard gap estimates.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/05/Fic/dt0521e.pdf
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0521.

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Length: 41 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:bde:wpaper:0521
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  2. Trabandt, Mathias, 2007. "Sticky Information vs. Sticky Prices: A Horse Race in a DSGE Framework," Kiel Working Papers 1369, Kiel Institute for the World Economy (IfW).
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