Contract length heterogeneity and the persistence of monetary shocks in a dynamic generalized Taylor economy

Dixon, Huw David; Kara, Engin

doi:10.1016/j.euroecorev.2010.05.003

Cited by 19 publications

(12 citation statements)

References 32 publications

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“…However, using the most disaggregated data might not lead to the best calibration. Since the Bils–Klenow data set used by Dixon and Kara (, ) is highly disaggregated with 350 frequencies, our results from the UK CPI data suggest that it would have been better for them to have used the frequency data in a more aggregated form.…”

Section: Introductionmentioning

confidence: 87%

“…We need to know which hypothetical frequency‐based distributions work best. In particular, Dixon and Kara (, ) assume that the frequencies correspond to the Bernoulli–Calvo distribution – there is a fixed Bernoulli probability each period that a firm's price will change.…”

Section: Introductionmentioning

confidence: 99%

“…Secondly, we interpret the frequency data under the hypothesis that within the sectors the frequency is generated by a Bernoulli–Calvo distribution as has been assumed in applied work by Dixon and Kara (, ). We look at this in two ways.…”

Section: Introductionmentioning

confidence: 99%

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What We can Learn About the Behaviour of Firms from the Average Monthly Frequency of Price‐Changes: An Application to the UK CPI Data

Dixon

Tian

2017

Oxf Bull Econ Stat

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The monthly frequency of price-changes is a prominent feature of many studies of the CPI micro-data. In this paper, we see what the frequency implies for the behaviour of price-setters in terms of the cross-sectional distribution average of price-spell durations across firms. We derive a lower bound for the mean duration of price-spells averaged across firms. We use the UK CPI data at the aggregate and sectoral level and find that the actual mean is about twice the theoretical minimum consistent with the observed frequency. We construct hypothetical Bernoulli-Calvo distributions from the frequency data which we find can result in similar impulse responses to the estimated hazards when used in the Smets-Wouters (2003) model. 2 See Kehoe and Midrigan (2015) for a discussion of the US data. 3 See Alvarez and Lippi (2014) for the case of multi-product firms. 4 COICOP stands for 'Classification of Individual Consumption According to Purpose' and is an international standard used for constructing consumer price indexes (see e.g. UN Statistics division

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Section: Introductionmentioning

confidence: 87%

Section: Introductionmentioning

confidence: 99%

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What We can Learn About the Behaviour of Firms from the Average Monthly Frequency of Price‐Changes: An Application to the UK CPI Data

Dixon

Tian

2017

Oxf Bull Econ Stat

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“…As shown in Dixon and Kara (2011), the presence of long-contracts has a disproportionate effect on the behaviour of aggregate output and inflation due to the strategic complementarity of prices. As shown in Dixon and Kara (2011), the presence of long-contracts has a disproportionate effect on the behaviour of aggregate output and inflation due to the strategic complementarity of prices.…”

Section: ] 545mentioning

confidence: 99%

“…The intuition behind the persistence of both the GC and GT is that the French price data has a fatter tail of long spells in the distribution of durations (and the cross-sectional DAF) than is present in the Calvo distribution. As shown in Dixon and Kara (2011), the presence of long-contracts has a disproportionate effect on the behaviour of aggregate output and inflation due to the strategic complementarity of prices. 19…”

Section: ] 545mentioning

confidence: 99%

Generalised Taylor and Generalised Calvo Price and Wage Setting: Micro‐evidence with Macro Implications

Dixon

Bihan

2012

The Economic Journal

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The Generalised Calvo and the Generalised Taylor models of price and wage setting are, unlike the standard Calvo and Taylor counterparts, exactly consistent with the distribution of durations observed in the data. Using price and wage micro-data from a major euro area economy (France), we develop calibrated versions of these models. We assess the consequences for monetary policy transmission by embedding these calibrated models in a standard dynamic stochastic general equilibrium model. The Generalised Taylor model is found to help rationalise the hump-shaped and persistent response of inflation, without resorting to the counterfactual assumption of systematic wage and price indexation. (2003) (hereafter SW) have developed Dynamic Stochastic General Equilibrium (DSGE) models of the US and euro area economies that have become standard tools for monetary policy analysis. These models have been designed to reflect the empirical properties of the US and euro area data in a way that is consistent with New Keynesian theory. In particular, these models have been shown to replicate the impulse-response functions of output and inflation to a monetary policy shock. Central to these models is the Calvo model of price and wage setting with indexation developed by Yun (1996) for prices and by Erceg et al. (2000) (hereafter EHL) for prices and wages: firms (unions) have a constant probability to be able to optimally reset prices (wages); when firms (unions) do not optimally reset prices (wages), the nominal price (wage) is automatically updated in response to inflation. 1 This approach is, however, inconsistent with the micro-data along two dimensions. First, it assumes that the probability of price re-optimisation is constant over time at the firm level. Second, it implies that nominal wages and prices adjust every period, which is counterfactual as noted, for example, by Cogley and Sbordone (2008) and Dixon and Kara (2010). Christiano et al. (2005) (hereafter CEE) and Smets and WoutersThe purpose of this article is to take the recent micro-data evidence on wages and prices seriously and apply it directly to alternative wage and pricing models. Our main point of departure is the aggregate distribution of durations of price and wage spells.

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The Role of Fiscal Policy — A Survey of Recent Empirical Findings

Le,

Meenagh,

Minford

2024

Open Econ Rev

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DSGE models based on New Keynesian principles, which have been extended to allow for banking, the zero lower bound on interest rates (ZLB), and varying price duration, can account well for recent macroeconomic behavior across a variety of economies. These models find that active fiscal policy can contribute to macroeconomic stability and welfare by reducing the frequency of hitting the ZLB. Fiscal policy can also share the stabilisation role with monetary policy, whose effectiveness under the ZLB is much reduced.

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Contract length heterogeneity and the persistence of monetary shocks in a dynamic generalized Taylor economy

Cited by 19 publications

References 32 publications

What We can Learn About the Behaviour of Firms from the Average Monthly Frequency of Price‐Changes: An Application to the UK CPI Data

What We can Learn About the Behaviour of Firms from the Average Monthly Frequency of Price‐Changes: An Application to the UK CPI Data

Generalised Taylor and Generalised Calvo Price and Wage Setting: Micro‐evidence with Macro Implications

The Role of Fiscal Policy — A Survey of Recent Empirical Findings

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