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Missing aggregate dynamics: on the slow convergence of lumpy adjustment models

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  • David Berger

    (Northwestern University)

Abstract

When the microeconomic adjustment underlying an aggregate variable is lumpy, conventional VAR procedures often imply less persistence than there really is. This is relevant for non-, semi- and structural models in macroeconomics. The extent to which persistence is underestimated decreases with the level of aggregation, yet convergence is very slow and the bias is likely to be present for sectoral data in general and, in some cases, for aggregate series as well. Paradoxically, while idiosyncratic productivity and demand shocks smooth away microeconomic non-convexities and are often used as a justification for approximating aggregate dynamics with linear models, their presence exacerbates the bias. We propose procedures to correct for the bias and provide various applications. In one of them, the difference in the speed with which inflation responds to sectoral and aggregate shocks disappears once we account for the "missing aggregate dynamics" bias.

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  • David Berger, 2013. "Missing aggregate dynamics: on the slow convergence of lumpy adjustment models," 2013 Meeting Papers 464, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:464
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    Cited by:

    1. Caggiano, Giovanni & Castelnuovo, Efrem, 2011. "On the dynamics of international inflation," Economics Letters, Elsevier, vol. 112(2), pages 189-191, August.
    2. Patrick Lünnemann & Thomas Y. Mathä, 2010. "Rigidities and inflation persistence of services and regulated prices," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(2-3), pages 193-208.
    3. Denis Fougere & Erwan Gautier & Herve Le Bihan, 2010. "Restaurant Prices and the Minimum Wage," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1199-1234, October.
    4. Jonathan Wadsworth, 2010. "Did the National Minimum Wage Affect UK Prices?," Fiscal Studies, Institute for Fiscal Studies, pages 81-120.
    5. Xavier Gabaix, 2004. "Power laws and the origins of aggregate fluctuations," Econometric Society 2004 North American Summer Meetings 484, Econometric Society.
    6. Mojon, Benoît & Altissimo, Filippo & Zaffaroni, Paolo, 2007. "Fast micro and slow macro: can aggregation explain the persistence of inflation?," Working Paper Series 729, European Central Bank.
    7. Todd E. Clark, 2006. "Disaggregate evidence on the persistence of consumer price inflation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., pages 563-587.
    8. Arantza Gorostiaga & Rubio-Ramírez Juan F., 2008. "Fiscal policy and minimum wage for redistribution: an equivalence result," Economics Bulletin, AccessEcon, pages 1-8.
    9. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Thomas J. Sargent & Mark W. Watson, 2007. "ABCs (and Ds) of Understanding VARs," American Economic Review, American Economic Association, pages 1021-1026.
    10. Albert Marcet & Juan Pablo Nicolini, 2005. "Money and Prices in Models of Bounded Rationality in High Inflation Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, pages 452-479.
    11. Gita Gopinath & Roberto Rigobon, 2006. "Sticky Borders," NBER Working Papers 12095, National Bureau of Economic Research, Inc.
    12. Zorn, Peter, 2016. "Investment under Rational Inattention: Evidence from US Sectoral Data," Annual Conference 2016 (Augsburg): Demographic Change 145572, Verein für Socialpolitik / German Economic Association.
    13. Daniele Coen-Pirani, 2004. "Markups, Aggregation, and Inventory Adjustment," American Economic Review, American Economic Association, pages 1328-1353.
    14. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, May.
    15. Juan Pablo Medina G. & David Rappoport W. & Claudio Soto G., 2007. "Dynamics of Price Adjustments: Evidence From Micro Level Data For Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, pages 5-26.
    16. Christian Calmès & Raymond Théoret, 2009. "The Impact of Off-Balance-Sheet Activities on Banks Returns: An Application of the ARCH-M to Canadian Data," RePAd Working Paper Series UQO-DSA-wp032009, Département des sciences administratives, UQO.
    17. Firgo, Matthias & Pennerstorfer, Dieter & Weiss, Christoph, 2015. "Network Centrality and Market Prices: An Empirical Note," Department of Economics Working Paper Series 4651, WU Vienna University of Economics and Business.
    18. Filippo Altissimo & Michael Ehrmann & Frank Smets, 2006. "Inflation persistence and price-setting behaviour in the euro area – a summary of the IPN evidence," Occasional Paper Series 46, European Central Bank.
    19. Adams, Zeno & Füss, Roland, 2010. "Macroeconomic determinants of international housing markets," Journal of Housing Economics, Elsevier, vol. 19(1), pages 38-50, March.
    20. Calmès, Christian & Théoret, Raymond, 2010. "The impact of off-balance-sheet activities on banks returns: An application of the ARCH-M to Canadian data," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1719-1728, July.
    21. Judith K. Hellerstein & David Neumark, 2008. "Workplace Segregation in the United States: Race, Ethnicity, and Skill," The Review of Economics and Statistics, MIT Press, pages 459-477.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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