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Sectoral Price Data and Models of Price Setting

  • Mirko Wiederholt

    (Northwestern University)

  • Emanuel Moench

    (Federal Reserve Bank of New York)

  • Bartosz Maćkowiak

    (European Central Bank)

We use a statistical model to estimate impulse responses of sectoral price indices to aggregate shocks and to sector-specific shocks. In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock. The Calvo model and the sticky-information model match this finding only under extreme assumptions concerning the profit-maximizing price. By contrast, the rational inattention model matches this finding without an extreme assumption concerning the profit-maximizing price. Furthermore, we find little variation across sectors in the speed of response of sectoral price indices to sector-specific shocks. The rational inattention model matches this finding, while the Calvo model predicts far too much cross-sectional variation in the speed of response to sector-specific shocks.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 666.

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Date of creation: 2009
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Handle: RePEc:red:sed009:666
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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