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Is a Calvo price setting model consistent with micro price data?

Author

Listed:
  • Luis J. Álvarez

    () (Banco de España)

  • Pablo Burriel

    () (Banco de España)

Abstract

This paper shows that the standard Calvo model clearly fails to account for the distribution of price durations found in micro data. We propose a novel price setting model that fully captures heterogeneity in individual pricing behavior. Specifically, we assume that there is a continuum of firms that set prices according to a Calvo mechanism, each of them with a possibly different price adjustment parameter. The model is estimated by maximum likelihood and closely matches individual consumer and producer price data. Incorporating estimated price setting rules into a standard DSGE model shows that fully accounting for pricing heterogeneity is crucial to understanding inflation and output dynamics. The standard calibration that assumes within sector homogeneity, as in Carvalho (2006), is at odds with micro data evidence and leads to a substantial distortion of estimates of the real impact of monetary policy.

Suggested Citation

  • Luis J. Álvarez & Pablo Burriel, 2010. "Is a Calvo price setting model consistent with micro price data?," Working Papers 1010, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1010
    as

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/10/Fic/dt1010e.pdf
    File Function: First version, April 2010
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Heterogeneity and Calvo Pricing
      by Agent Continuum in Agent Continuum on 2010-04-19 21:20:59

    Citations

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    Cited by:

    1. Diego Romero-Ávila & Carlos Usabiaga, 2012. "Disaggregate evidence on Spanish inflation persistence," Applied Economics, Taylor & Francis Journals, vol. 44(23), pages 3029-3046, August.
    2. Etro, Federico & Rossi, Lorenza, 2015. "Optimal monetary policy under Calvo pricing with Bertrand competition," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 423-440.
    3. Carlos Usabiaga & Diego Romero-Ávila, 2012. "New Disaggregate Evidence on Spanish Inflation Persistence," EcoMod2012 3800, EcoMod.

    More about this item

    Keywords

    price setting; Calvo model; heterogeneity; hazard rate;

    JEL classification:

    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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