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The Cross-Section of Output and Inflation in a Dynamic Stochastic General Equilibrium Model with Sticky Prices

  • Döpke, J.
  • Funke, M.
  • Holly, S.
  • Weber, S.

In a standard dynamic stochastic general equilibrium framework, with sticky prices, the cross sectional distribution of output and inflation across a population of firms is studied. The only form of heterogeneity is confined to the probability that the ith firm changes its prices in response to a shock. In this Calvo setup the moments of the cross sectional distribution of output and inflation depend crucially on the proportion of firms that are allowed to change their prices. We test this model empirically using German balance sheet data on a very large population of firms. We find a significant counter-cyclical correlation between the skewness of output responses and the aggregate economy. Further analysis of sectoral data for the US suggests that there is a positive relationship between the skewness of inflation and aggregates, but the relation with output skewness is less sure. Our results can be interpreted as indirect evidence of the importance of price stickiness in macroeconomic adjustment.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0853.

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Date of creation: Sep 2008
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Handle: RePEc:cam:camdae:0853
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