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A New Keynesian Model with Heterogeneous Price Setting

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  • Paul Middleditch

Abstract

The Calvo contract pricing mechanism has become the most widely accepted microfoundation to the NK Phillips curve but unfortunately predicts that all firms in the economy face the same probability of price change. To better explain the stylized fact this paper relaxes the homogeneous firm assumption in the Calvo contract, to provide a macroeconomic explanation more consistent with recently available microeconomic evidence that suggests firms face differing probabilities of price change. A simple New Keynesian dynamic stochastic general equilibrium (DSGE) model with nominal rigidities and habit in consumption for the US is estimated using Bayesian techniques and finds evidence of a flexible price sector of around 6% and a sticky price sector of between 55% and 70% depending on model specification.

Suggested Citation

  • Paul Middleditch, 2010. "A New Keynesian Model with Heterogeneous Price Setting," Centre for Growth and Business Cycle Research Discussion Paper Series 150, Economics, The University of Manchester.
    • Handle: RePEc:man:cgbcrp:150
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    File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr150.pdf
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    1. Price rigidity all wrong
      by Economic Logician in Economic Logic on 2010-11-29 21:35:00

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    2. Ma, Yong & Li, Shushu, 2015. "Bayesian estimation of China's monetary policy transparency: A New Keynesian approach," Economic Modelling, Elsevier, vol. 45(C), pages 236-248.

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