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Evidence from surveys of price-setting managers: Policy lessons and directions for ongoing research

  • Vítor Gaspar
  • Andrew Levin
  • Fernando Martins
  • Frank Smets

Understanding the determinants of individual price setting behaviour is crucial for the formulation of monetary policy, especially in an economy experiencing ongoing structural change. These behavioural mechanisms play a fundamental role in influencing the characteristics of aggregate inflation and in determining how monetary policy affects inflation and real economic activity. Thus, this line of research can strengthen the conceptual foundations of general equilibrium models with sticky prices, enabling these models to provide monetary policymakers with an increasingly useful framework for interpreting and forecasting the evolution of the macroeconomy. In this paper, we introduce the Walrasian model as a benchmark for comparison, and we discuss the extent to which recent micro evidence on firms’ price setting behavior provides significant support for some basic elements of the New Keynesian perspective. We then proceed to analyze the implications of the micro evidence in distinguishing between competing theories of price stickiness. Finally, the paper concludes with some brief reflections about the lessons for monetary policy.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200927.

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Date of creation: 2009
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Handle: RePEc:ptu:wpaper:w200927
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