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Reconciling Microeconomic and Macroeconomic Estimates of Price Stickiness

  • Adam Cagliarini

    (Reserve Bank of Australia)

  • Tim Robinson

    (Reserve Bank of Australia)

  • Allen Tran

    (Reserve Bank of Australia)

This paper attempts to reconcile the high estimates of price stickiness from macroeconomic estimates of a New-Keynesian Phillips Curve (NKPC) with the lower values obtained from surveys of firms’ pricing behaviour. This microeconomic evidence also suggests that the frequency with which firms adjust their prices varies across sectors. The paper shows that in the presence of this heterogeneity, estimates of aggregate price stickiness from microeconomic and macroeconomic data should differ. Heterogeneity in firms’ pricing decisions, as well as a more realistic production structure, is introduced into an otherwise standard New-Keynesian model. Using a model calibrated with microeconomic pricing survey data for Australia, the paper shows that estimates of the NKPC considerably overstate the true degree of price stickiness and may falsely suggest that some prices are indexed to past inflation. These problems arise because of a type of misspecification and a lack of suitable instruments.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2010-01.

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Date of creation: Mar 2010
Date of revision:
Handle: RePEc:rba:rbardp:rdp2010-01
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