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

Author

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  • Jörg Döpke
  • Michael Funke
  • Sean Holly
  • Sebastian Weber

Abstract

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 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 inflation and aggregates, but the relation with output is less sure. Our results can be interpreted as indirect evidence of the importance of price stickiness in macroeconomic adjustments.

Suggested Citation

  • Jörg Döpke & Michael Funke & Sean Holly & Sebastian Weber, 2009. "The Cross-Section of Output and Inflation in a Dynamic Stochastic General Equilibrium Model with Sticky Prices," Discussion Papers of DIW Berlin 896, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp896
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    Cited by:

    1. Ruediger Bachmann & Christian Bayer, 2009. "Firm-Specific Productivity Risk over the Business Cycle: Facts and Aggregate Implications," 2009 Meeting Papers 869, Society for Economic Dynamics.
    2. Christian Bayer & Ruediger Bachmann, 2009. "The Cross-section of Firms over the Business Cycle: New Facts and a DSGE Exploration," 2009 Meeting Papers 866, Society for Economic Dynamics.
    3. Clemens, Marius, 2016. "Migration, Unemployment and the Business Cycle - A Euro Area Perspective," VfS Annual Conference 2016 (Augsburg): Demographic Change 145578, Verein für Socialpolitik / German Economic Association.

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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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