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A unified framework for understanding and comparing dynamic wage and price setting models

This paper argues that the cross-sectional approach to durations is essential to understand nominal rigidity because this captures the fact that price-spells are generated by firms' price-setting behavior. Since the distribution of durations is dominated by a proliferation of short contracts, the cross-sectional measure corrects for this by length-biased sampling. Modelling the price-spell durations in this way enables us to see how Taylor, Calvo and their generalizations relate to each other, and enable us to compare price-setting behavior for a given distribution of durations. We also show how the micro-data can be directly related to the macroeconomic pricing models in this setting.

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2009/20.

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Length: 45 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:cdf:wpaper:2009/20
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  1. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  2. Luca Guerrieri, 2002. "The inflation persistence of staggered contracts," International Finance Discussion Papers 734, Board of Governors of the Federal Reserve System (U.S.).
  3. 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.
  4. Dixon, Huw & Kara, Engin, 2006. "How to Compare Taylor and Calvo Contracts: A Comment on Michael Kiley," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 1119-1126, June.
  5. Andrew Levin & Günter Coenen, 2005. "Identifying the Influences of Nominal and Real Rigidities in Aggregate Price-Setting Behavior," Computing in Economics and Finance 2005 66, Society for Computational Economics.
  6. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  7. Alan S. Blinder, 1991. "Why are Prices Sticky? Preliminary Results from an Interview Study," NBER Working Papers 3646, National Bureau of Economic Research, Inc.
  8. Dias, D.A. & Marques, C. Robalo & Santos Silva, J.M.C., 2007. "Time- or state-dependent price setting rules? Evidence from micro data," European Economic Review, Elsevier, vol. 51(7), pages 1589-1613, October.
  9. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  10. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  11. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
  12. 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.
  13. Kiley, Michael T, 2002. "Partial Adjustment and Staggered Price Setting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 283-98, May.
  14. Richard Mash, 2006. "Optimising Microfoundations for Inflation Persistence," Computing in Economics and Finance 2006 457, Society for Computational Economics.
  15. Kevin D. Sheedy, 2007. "Intrinsic inflation persistence," LSE Research Online Documents on Economics 3739, London School of Economics and Political Science, LSE Library.
  16. Emmanuel Dhyne & Luis J. Álvarez & Hervé Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lünnemann & Fabio Rumler & Jouko Vilmunen, 2005. "Price setting in the euro area: Some stylized facts from Individual Consumer Price Data," Working Paper Research 74, National Bank of Belgium.
  17. Paustian, Matthias & von Hagen, Jürgen, 2008. "The Role of Contracting Schemes for Assessing the Welfare Costs of Nominal Rigidities," CEPR Discussion Papers 6726, C.E.P.R. Discussion Papers.
  18. Hall, Simon & Walsh, Mark & Yates, Anthony, 2000. "Are UK Companies' Prices Sticky?," Oxford Economic Papers, Oxford University Press, vol. 52(3), pages 425-46, July.
  19. Carlos Carvalho & Fernanda Nechio, 2010. "Aggregation and the PPP puzzle in a sticky-price model," Working Paper Series 2010-06, Federal Reserve Bank of San Francisco.
  20. Lancaster,Tony, 1992. "The Econometric Analysis of Transition Data," Cambridge Books, Cambridge University Press, number 9780521437899, April.
  21. Michael Dotsey & Robert G. King, 2006. "Pricing, Production, and Persistence," Journal of the European Economic Association, MIT Press, vol. 4(5), pages 893-928, 09.
  22. Luis J. Álvarez & Ignacio Hernando, 2004. "Price setting behaviour in Spain: stylised facts using consumer price micro data," Working Papers 0422, Banco de España;Working Papers Homepage.
  23. Alan S. Blinder, 1994. "On Sticky Prices: Academic Theories Meet the Real World," NBER Chapters, in: Monetary Policy, pages 117-154 National Bureau of Economic Research, Inc.
  24. Richard Mash, 2003. "New Keynesian Microfoundations Revisited: A Calvo-Taylor-Rule-of-Thumb Model and Optimal Monetary Policy Delegation," Economics Series Working Papers 174, University of Oxford, Department of Economics.
  25. Carlos Carvalho, 2005. "Heterogeneity in Price Setting and the Real Effects of Monetary Shocks," Macroeconomics 0509017, EconWPA, revised 12 Sep 2005.
  26. Álvarez, Luis J. & Burriel, Pablo & Hernando, Ignacio, 2005. "Do decreasing hazard functions for price changes make any sense?," Working Paper Series 0461, European Central Bank.
  27. Alexander L. Wolman, 1999. "Sticky prices, marginal cost, and the behavior of inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 29-48.
  28. Veronese, Giovanni & Fabiani, Silvia & Gattulli, Angela & Sabbatini, Roberto, 2005. "Consumer price behaviour in Italy: evidence from micro CPI data," Working Paper Series 0449, European Central Bank.
  29. John, A.Andrew & Wolman, Alexander L., 2008. "Steady-state equilibrium with state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 383-405, March.
  30. 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.
  31. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1415-1464.
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