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What do sticky and flexible prices tell us?

  • Millard, Stephen

    ()

    (Bank of England)

  • O'Grady, Tom

    ()

    (Massachusetts Institute of Technology)

In this paper, we investigate the information content of prices in relatively sticky-price sectors versus relatively flexible-price sectors. We first present some empirical evidence that relatively flexible prices react more to deviations of output from trend than stickier prices and that sticky prices can tell us about firms’ inflation expectations. We then develop a simple DSGE model with a sticky-price sector and a flexible-price sector and use this model to show that these empirical results are exactly what you would actually expect to see, given standard economic theory. Taken together, the results of this paper suggest that calculations of ‘flexible-price’ inflation could, potentially, be used to provide monetary policy makers with a steer on the output gap, which is notoriously hard to measure, and that calculations of ‘sticky-price’ inflation could, potentially, be used to provide monetary policy makers with a steer on the medium-term inflation expectations of price-setters.

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Paper provided by Bank of England in its series Bank of England working papers with number 457.

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Length: 29 pages
Date of creation: 20 Jul 2012
Date of revision:
Handle: RePEc:boe:boeewp:0457
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  1. Carvalho Carlos, 2006. "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-58, December.
  2. Huw Dixon & Engin Kara, 2010. "Can We Explain Inflation Persistence in a Way that Is Consistent with the Microevidence on Nominal Rigidity?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 151-170, 02.
  3. Adam Cagliarini & Tim Robinson & Allen Tran, 2010. "Reconciling Microeconomic and Macroeconomic Estimates of Price Stickiness," RBA Research Discussion Papers rdp2010-01, Reserve Bank of Australia.
  4. Engin Kara & Huw Dixon, 2005. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Computing in Economics and Finance 2005 87, Society for Computational Economics.
  5. Kevin D. Sheedy, 2007. "Inflation persistence when price stickiness differs between industries," LSE Research Online Documents on Economics 3738, London School of Economics and Political Science, LSE Library.
  6. Dixon, H. & Le Bihan, H., 2011. "Generalized Taylor and Generalized Calvo price and wage-setting: micro evidence with macro implications," Working papers 324, Banque de France.
  7. Philip Bunn & Colin Ellis, 2012. "How do Individual UK Producer Prices Behave?," Economic Journal, Royal Economic Society, vol. 122(558), pages F16-F34, 02.
  8. Kevin D. Sheedy, 2007. "Intrinsic Inflation Persistence," CEP Discussion Papers dp0837, Centre for Economic Performance, LSE.
  9. Engin Kara, 2009. "Micro data on nominal rigidity, inflation persistence and optimal monetary policy," Working Paper Research 175, National Bank of Belgium.
  10. Richard Mash, 2006. "Optimising Microfoundations for Inflation Persistence," Computing in Economics and Finance 2006 457, Society for Computational Economics.
  11. Mackowiak, Bartosz Adam & Moench, Emanuel & Wiederholt, Mirko, 2009. "Sectoral Price Data and Models of Price Setting," CEPR Discussion Papers 7339, C.E.P.R. Discussion Papers.
  12. Altissimo, Filippo & Mojon, Benoit & Zaffaroni, Paolo, 2009. "Can aggregation explain the persistence of inflation?," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 231-241, March.
  13. Greenslade, Jennifer & Parker, Miles, 2010. "New insights into price-setting behaviour in the United Kingdom," Bank of England working papers 395, Bank of England.
  14. Michael F. Bryan & Brent Meyer, 2010. "Are some prices in the CPI more forward looking than others? We think so," Economic Commentary, Federal Reserve Bank of Cleveland, issue May.
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