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Evaluating Models of Sticky Prices

Author

Listed:
  • Jonas Fisher
  • Martin Eichenbaum

Abstract

Can variants of the classic Calvo (1983) model of sticky prices account for the statistical behavior of post-war US inflation? We develop and test versions of the model for which the answer to this question is yes. We then investigate whether these models imply plausible degrees of inertia in price setting behavior by firms. We find that they do, but only if we depart from two auxiliary assumptions made in standard expositions of the Calvo model. These assumptions are that monopolistically competitive firms face a constant elasticity of demand and capital can be instantaneously reallocated after a shock. When we modify these assumptions our model is consistent with the view that firms re-optimize prices, on average, once every two quarters

Suggested Citation

  • Jonas Fisher & Martin Eichenbaum, 2005. "Evaluating Models of Sticky Prices," Computing in Economics and Finance 2005 175, Society for Computational Economics.
    • Handle: RePEc:sce:scecf5:175
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    Citations

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    Cited by:

    1. Beck, Günter W. & Lein, Sarah M., 2015. "Microeconometric evidence on demand-side real rigidity and implications for monetary non-neutrality," Working papers 2015/13, Faculty of Business and Economics - University of Basel.
    2. Beck, Günter W. & Lein, Sarah M., 2020. "Price elasticities and demand-side real rigidities in micro data and in macro models," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 200-212.
    3. Daniela Fantozzi & Alessio Muscarnera, 2021. "A News-based Policy Index for Italy: Expectations and Fiscal Policy," CEIS Research Paper 509, Tor Vergata University, CEIS, revised 11 Mar 2021.

    More about this item

    Keywords

    sticky prices; specific capital; inflation;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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