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Sectoral price facts in a sticky-price model

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Listed author(s):
  • Carlos Carvalho
  • Jae Won Lee

Abstract

We develop a multi-sector sticky-price DSGE (dynamic stochastic general equilibrium) model that can endogenously deliver differential responses of prices to aggregate and sectoral shocks. Input-output production linkages induce across-sector pricing complementarities that contribute to a slow response of prices to aggregate shocks. In turn, input-market segmentation at the sectoral level induces within-sector pricing substitutability, which helps the model deliver a fast response of prices to sector-specific shocks. Estimating the factor-augmented vector autoregression specification of Boivin, Giannoni, and Mihov (2009) on data generated by a parameterized version of our model, we find results that resemble what they obtain with disaggregated data for the U.S. economy. We then employ Bayesian methods to estimate the model using aggregate and sectoral data, and find that it accounts extremely well for a wide range of sectoral price facts.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 495.

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Date of creation: 2011
Handle: RePEc:fip:fednsr:495
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Keywords: Equilibrium (Economics) ; Stochastic analysis ; Econometric models ; Prices ; Vector autoregression ; Bayesian statistical decision theory;

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Find related papers by JEL classification:
  • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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  1. 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.
  2. Christian Hellwig & Ariel Burstein, 2007. "Prices and Market Shares in a Menu Cost Model," 2007 Meeting Papers 327, Society for Economic Dynamics.
  3. Basu, Susanto, 1995. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," American Economic Review, American Economic Association, vol. 85(3), pages 512-531, June.
  4. Hafedh Bouakez & Emanuela Cardia & Francisco J. Ruge-Murcia, 2009. "The Transmission Of Monetary Policy In A Multisector Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1243-1266, November.
  5. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-1277, November.
  6. Jean Boivin & Marc P. Giannoni & Ilian Mihov, 2009. "Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data," American Economic Review, American Economic Association, vol. 99(1), pages 350-384, March.
  7. Mark Gertler & John Leahy, 2008. "A Phillips Curve with an Ss Foundation," Journal of Political Economy, University of Chicago Press, vol. 116(3), pages 533-572, 06.
  8. 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.
  9. Andrade, Philippe & Zachariadis, Marios, 2016. "Global versus local shocks in micro price dynamics," Journal of International Economics, Elsevier, vol. 98(C), pages 78-92.
  10. Felipe Schwartzman & Carlos Carvalho, 2008. "Heterogeneous Price Setting Behavior and Monetary Non-neutrality: Some General Results," 2008 Meeting Papers 1040, Society for Economic Dynamics.
  11. Maral Shamloo, 2010. "Price Setting in a Model with Production Chains; Evidence from Sectoral Data," IMF Working Papers 10/82, International Monetary Fund.
  12. Maćkowiak, Bartosz & Moench, Emanuel & Wiederholt, Mirko, 2009. "Sectoral price data and models of price setting," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 78-99.
  13. 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.
  14. 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.
  15. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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Cited by:

  1. Carlos Carvalho & Fernanda Nechio, 2016. "Factor Specificity and Real Rigidities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 208-222, October.
  2. Andrade, Philippe & Zachariadis, Marios, 2016. "Global versus local shocks in micro price dynamics," Journal of International Economics, Elsevier, vol. 98(C), pages 78-92.
  3. Emi Nakamura & Jón Steinsson, 2013. "Price Rigidity: Microeconomic Evidence and Macroeconomic Implications," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 133-163, 05.
  4. Bouakez, Hafedh & Cardia, Emanuela & Ruge-Murcia, Francisco, 2014. "Sectoral price rigidity and aggregate dynamics," European Economic Review, Elsevier, vol. 65(C), pages 1-22.
  5. Ferre De Graeve & Karl Walentin, 2015. "Refining Stylized Facts from Factor Models of Inflation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(7), pages 1192-1209, November.
  6. Kaufmann, Daniel & Lein, Sarah M., 2013. "Sticky prices or rational inattention – What can we learn from sectoral price data?," European Economic Review, Elsevier, vol. 64(C), pages 384-394.
  7. Manoj Atolia & Ryan Chahrour, 2013. "Intersectoral Linkages, Diverse Information, and Aggregate Dynamics," Boston College Working Papers in Economics 832, Boston College Department of Economics, revised 12 May 2015.
  8. Jae Won Lee, 2012. "Aggregate Implications of Heterogeneous Households in a Sticky‐Price Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(1), pages 1-22, 02.
  9. Hubrich, Kirstin & Marcellino, Massimiliano & Beck, Günter W., 2011. "On the importance of sectoral and regional shocks for price-setting," Working Paper Series 1334, European Central Bank.
  10. Carlos Carvalho & Fernanda Nechio, 2014. "Factor SpecifiÂ…city and Real Rigidities," 2014 Meeting Papers 1241, Society for Economic Dynamics.
  11. Ryan Chahrour & Manoj Atolia, 2015. "Intersectoral Linkages, Diverse Information, and Aggregate Dynamics in a Neoclassical Model," 2015 Meeting Papers 398, Society for Economic Dynamics.

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