What do sticky and flexible prices tell us?
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.
|Date of creation:||20 Jul 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barnett, Alina & Macallan, Clare & Pezzini, Silvia, 2010. "Public attitudes to inflation and monetary policy," Bank of England Quarterly Bulletin, Bank of England, vol. 50(2), pages 115-123.
- Dixon, H. & Le Bihan, H., 2011.
"Generalized Taylor and Generalized Calvo price and wage-setting: micro evidence with macro implications,"
324, Banque de France.
- Huw Dixon & Hervé Le Bihan, 2012. "Generalised Taylor and Generalised Calvo Price and Wage Setting: Micro‐evidence with Macro Implications," Economic Journal, Royal Economic Society, vol. 122(560), pages 532-554, 05.
- Huw D. Dixon & Hervé Le Bihan, 2010. "Generalized Taylor and Generalized Calvo Price and Wage-Setting: Micro Evidence with Macro Implications," CESifo Working Paper Series 3119, CESifo Group Munich.
- Dixon, Huw David & Bihan, Hervé Le, 2011. "Generalized Taylor and Generalized Calvo price and wage-setting: micro evidence with macro implications," Cardiff Economics Working Papers E2011/25, Cardiff University, Cardiff Business School, Economics Section.
- Richard Mash, 2006.
"Optimising Microfoundations for Inflation Persistence,"
Computing in Economics and Finance 2006
457, Society for Computational Economics.
- Richard Mash, 2004. "Optimising Microfoundations for Inflation Persistence," Economics Series Working Papers 183, University of Oxford, Department of Economics.
- Dixon, Huw David & Kara, Engin, 2008.
"Can we explain inflation persistence in a way that is consistent with the micro-evidence on nominal rigidity?,"
Cardiff Economics Working Papers
E2008/22, Cardiff University, Cardiff Business School, Economics Section.
- 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.
- Cagliarini, Adam & Robinson, Tim & Tran, Allen, 2011.
"Reconciling microeconomic and macroeconomic estimates of price stickiness,"
Journal of Macroeconomics,
Elsevier, vol. 33(1), pages 102-120, March.
- 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.
- 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.
- 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.
- Kevin D. Sheedy, 2007.
"Inflation Persistence When Price Stickiness Differs Between Industries,"
CEP Discussion Papers
dp0838, Centre for Economic Performance, LSE.
- 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.
- Dixon, Huw & Kara, Engin, 2005.
"Persistence and nominal inertia in a generalized Taylor economy: how longer contracts dominate shorter contracts,"
Working Paper Series
0489, European Central Bank.
- 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.
- Dixon, Huw David & Kara, Engin, 2007. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Cardiff Economics Working Papers E2007/1, Cardiff University, Cardiff Business School, Economics Section.
- Huw Dixon & Engin Kara, 2007. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Discussion Papers 07-01, Department of Economics, University of Birmingham.
- Engin Kara & Huw Dixon, 2005. "Persistence and Nominal Inertia in a Generalised Taylor Economy: How Loner Contracts Dominate Shorter Contracts," Money Macro and Finance (MMF) Research Group Conference 2005 82, Money Macro and Finance Research Group.
- Bunn, Philip & Ellis, Colin, 2010.
"How do individual UK producer prices behave?,"
Bank of England working papers
394, Bank of England.
- 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.
- 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.
- Greenslade, Jennifer & Parker, Miles, 2010. "New insights into price-setting behaviour in the United Kingdom," Bank of England working papers 395, Bank of England.
- Engin Kara, 2009.
"Micro data on nominal rigidity, inflation persistence and optimal monetary policy,"
Working Paper Research
175, National Bank of Belgium.
- Kara Engin, 2011. "Micro-Data on Nominal Rigidity, Inflation Persistence and Optimal Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-19, July.
- Kevin D. Sheedy, 2007.
"Intrinsic inflation persistence,"
LSE Research Online Documents on Economics
3739, London School of Economics and Political Science, LSE Library.
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:0457. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publications Team)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.