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Persistence Endogeneity Via Adjustment Costs: An Assessment based on Bayesian Estimations

  • Sebastian Sienknecht

    ()

    (School of Economics and Business Administration, Friedrich Schiller University Jena)

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    This paper estimates a dynamic stochastic general equilibrium (DSGE) model for the European Monetary Union by using Bayesian techniques. A salient feature of the model is an extension of the typically postulated quadratic cost structure for the monopolistic choice of price variables. As shown in Sienknecht (2010a), the enlargement of the original formulation by Rotemberg (1983) and Hairault and Portier (1993) leads to structurally more sophisticated inflation schedules than in the staggering environment by Calvo (1983) with rule-of-thumb setters. In particular, a desired lagged inflation term always arises toghether with a two-period-ahead expectational expression. The two terms are directly linked by a novel structural parameter. We confront the relationships obtained by Sienknecht (2010a) against European data and compare their data description performance against the widespread extension of the Calvo setting with rule-of-thumb behavior.

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    Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2010-057.

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    Date of creation: 24 Aug 2010
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    Handle: RePEc:jrp:jrpwrp:2010-057
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    1. Henzel, Steffen & Hülsewig, Oliver & Mayer, Eric, 2009. "The price puzzle revisited: Can the cost channel explain a rise in inflation after a monetary policy shock?," Munich Reprints in Economics 19421, University of Munich, Department of Economics.
    2. Fernandez-Villaverde, Jesus & Francisco Rubio-Ramirez, Juan, 2004. "Comparing dynamic equilibrium models to data: a Bayesian approach," Journal of Econometrics, Elsevier, vol. 123(1), pages 153-187, November.
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