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Multi-Sectoral Cascading and Price Dynamics - A Bayesian Econometric Evaluation

Author

Listed:
  • Alejandro Justiniano

    (Federal Reserve Board)

  • Michael Kumhof

    (International Monetary Fund)

  • Federico Ravenna

    (University of California, Santa Cruz)

Abstract

Recent evidence by Bils and Klenow (2004) and Klenow and Kryvstov (2003) shows that the average price duration for US CPI-basket goods is in the order of one to two quarters, challenging the monetary business cycle research to try and explain how short price durations can nevertheless generate a large degree of aggregate inflation persistence. We empirically test the relevance of a cascading structure of production as an explanation for short price durations and large aggregate inflation persistence. The final good is produced through a chain of intermediate goods, which undergo several processing stages. At each stage the price is set in nominal terms, and can be adjusted only at random intervals. Though each individual price is adjusted frequently, because the final good price embeds the intermediate price movements, it will turn out to have a large degree of stickiness. We estimate the model using Bayesian techniques to evaluate the relative role of indexation, pricing contracts length, and cascading production structure in the US postwar data. The estimation shows that short pricing contracts within the standard Calvo pricing mechanism are compatible with large inflation persistence, and inflation indexation turns out to play a much less relevant role - in other words, it ends up being a reduced-form model for the cascading production structure

Suggested Citation

  • Alejandro Justiniano & Michael Kumhof & Federico Ravenna, 2006. "Multi-Sectoral Cascading and Price Dynamics - A Bayesian Econometric Evaluation," Computing in Economics and Finance 2006 422, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:422
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    File URL: http://repec.org/sce2006/up.14115.1141153417.pdf
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    References listed on IDEAS

    as
    1. Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(3), pages 863-904.
    2. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    3. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    4. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
    5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    6. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Jean Imbs & Eric Jondeau & Florian Pelgrin, 2006. "Aggregating Phillips curves," 2006 Meeting Papers 640, Society for Economic Dynamics.
    2. Imbs, Jean & Jondeau, Eric & Pelgrin, Florian, 2011. "Sectoral Phillips curves and the aggregate Phillips curve," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 328-344.

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    More about this item

    Keywords

    Inflation Inertia; Monetary Policy; Bayesian Estimation; Multisectoral Cascading;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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