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A New Keynesian Model with Heterogeneous Price Setting

  • Paul Middleditch

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.

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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 150.

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Length: 49 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:man:cgbcrp:150
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  1. Kevin D. Sheedy, 2007. "Intrinsic inflation persistence," LSE Research Online Documents on Economics 3739, London School of Economics and Political Science, LSE Library.
  2. Daniel Dias & Carlos Robalo Marques & J.M.C.Santos Silva, 2005. "Time or State Dependent Price Setting Rules? Evidence from Portuguese Micro Data," Working Papers w200508, Banco de Portugal, Economics and Research Department.
  3. Ali Choudhary & Thorlakur Karlsson & Gylfi Zoega, 2009. "Survey Evidence on Customer Markets," Economics wp45, Department of Economics, Central bank of Iceland.
  4. Luis J. Álvarez & Pablo Burriel & Ignacio Hernando, 2005. "Do decreasing hazard functions for price changes make any sense?," Banco de Espa�a Working Papers 0508, Banco de Espa�a.
  5. 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.
  6. Riggi, Marianna & Tancioni, Massimiliano, 2010. "Nominal vs real wage rigidities in New Keynesian models with hiring costs: A Bayesian evaluation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(7), pages 1305-1324, July.
  7. Maral Shamloo, 2010. "Price Setting in a Model with Production Chains: Evidence from Sectoral Data," IMF Working Papers 10/82, International Monetary Fund.
  8. Josef Baumgartner & Ernst Glatzer & Fabio Rumler & Alfred Stiglbauer, 2005. "How Frequently Do Consumer Prices Change in Austria? Evidence from Micro CPI Data," Working Papers 101, Oesterreichische Nationalbank (Austrian Central Bank).
  9. Paul Levine & Joseph Pearlman & Bo Yang, 2008. "The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott," Review of International Economics, Wiley Blackwell, vol. 16(4), pages 728-746, 09.
  10. Dixon, Huw & Kara, Engin, 2006. "How to Compare Taylor and Calvo Contracts: A Comment on Michael Kiley," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 1119-1126, June.
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