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Industrial Transformation, Heterogeneity in Price Stickiness, and the Great Moderation

  • Flamini, Alessandro
  • Ascari, Guido
  • Rossi, Lorenza

Since the ’80s the volatility of output growth and inflation experienced by several industrialized countries has remarkably declined, what has been dubbed the “Great Moderation”. Various explanations have been proposed and likely all play some role. This paper shows that when an industrial transformation reduces the weight of the manufacturing sector relative to the services sector, the presence of sectoral heterogeneity in price stickiness leads to a significant decline in the volatility of inflation and output growth.

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Paper provided by CEPREMAP in its series Dynare Working Papers with number 24.

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Length: 23 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:cpm:dynare:024
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  1. Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 171-192, Spring.
  2. Dixon, Huw & Kara, Engin, 2011. "Contract length heterogeneity and the persistence of monetary shocks in a dynamic generalized Taylor economy," European Economic Review, Elsevier, vol. 55(2), pages 280-292, February.
  3. Burren, Daniel & Neusser, Klaus, 2013. "The Role Of Sectoral Shifts In The Decline Of Real Gdp Volatility," Macroeconomic Dynamics, Cambridge University Press, vol. 17(03), pages 477-500, April.
  4. 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.
  5. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
  6. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
  7. Bunn, Philip & Ellis, Colin, 2011. "How do individual UK consumer prices behave?," Bank of England working papers 438, Bank of England.
  8. 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.
  9. 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.
  10. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers.
  11. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  12. Alessio Moro, 2012. "The Structural Transformation Between Manufacturing and Services and the Decline in the US GDP Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 402-415, July.
  13. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  14. Guido Ascari & Alessandro Flamini & Lorenza Rossi, 2012. "Nominal Rigidities, Supply Shocks and Economic Stability," DEM Working Papers Series 024, University of Pavia, Department of Economics and Management.
  15. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  16. Alessandro Flamini, 2012. "Heterogeneity in Sectoral Price Stickiness, Aggregate Dynamics and Monetary Policy Pitfalls with Real Shocks," DEM Working Papers Series 023, University of Pavia, Department of Economics and Management.
  17. Adjemian, Stéphane & Bastani, Houtan & Karamé, Fréderic & Juillard, Michel & Maih, Junior & Mihoubi, Ferhat & Perendia, George & Pfeifer, Johannes & Ratto, Marco & Villemot, Sébastien, 2011. "Dynare: Reference Manual Version 4," Dynare Working Papers 1, CEPREMAP, revised Jul 2014.
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