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Estimating the Cross-sectional Distribution of Price Stickiness from Aggregate Data

  • Niels Arne Dam

    (Danmarks Nationalbank)

  • Carlos Carvalho

    (Federal Reserve Bank of New York)

We estimate sticky-price models for the U.S. economy in which the degree of price stickiness is allowed to vary across sectors. Perhaps surprisingly, we use only aggregate data on nominal and real output. In our models, identification of the cross-sectional distribution of price stickiness is made possible by the fact that different sectors are relatively more important in determining the response of aggregate variables to shocks at different frequencies. We find that the distribution of price stickiness inferred from aggregate data is strikingly similar to the distribution obtained from the recent empirical literature on microeconomic aspects of price setting in the U.S. economy. We also employ a Bayesian approach to combine time-series data on aggregate nominal and real output with such microeconomic information. Our results show that heterogeneity in price stickiness is of critical importance for understanding the joint dynamics of output and prices. Moreover, allowing for enough heterogeneity - in particular for prices in some sectors to last beyond one year - is crucial to avoid producing estimates that imply too little average nominal rigidity at the expense of too much real rigidity, relative to the specification of the model favored by the data.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 702.

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Date of creation: 2009
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Handle: RePEc:red:sed009:702
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  1. Etienne Gagnon, 2007. "Price setting during low and high inflation: evidence from Mexico," International Finance Discussion Papers 896, Board of Governors of the Federal Reserve System (U.S.).
  2. Carlos Carvalho & Fernanda Nechio, 2010. "Aggregation and the PPP puzzle in a sticky-price model," Working Paper Series 2010-06, Federal Reserve Bank of San Francisco.
  3. Argia M. Sbordone, 2001. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Departmental Working Papers 199822, Rutgers University, Department of Economics.
  4. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  5. Andrew Levin & Günter Coenen, 2005. "Identifying the Influences of Nominal and Real Rigidities in Aggregate Price-Setting Behavior," Computing in Economics and Finance 2005 66, Society for Computational Economics.
  6. Laurence Ball & David Romer, 1987. "Real Rigidities and the Non-Neutrality of Money," NBER Working Papers 2476, National Bureau of Economic Research, Inc.
  7. Engin Kara & Huw Dixon, 2005. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Computing in Economics and Finance 2005 87, Society for Computational Economics.
  8. Kevin D. Sheedy, 2007. "Inflation persistence when price stickiness differs between industries," LSE Research Online Documents on Economics 3738, London School of Economics and Political Science, LSE Library.
  9. Carvalho Carlos, 2006. "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-58, December.
  10. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
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