Identifying the influences of nominal and real rigidities in aggregate price-setting behavior

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in IDENTIFYING THE INFLUENCES OF NOMINAL AND REAL RIGIDITIES IN AGGREGATE PRICE-SETTING BEHAVIORby Günter Coenen and Andrew T. LevinIn 2004 all publications will carry a motif taken from the €100 banknote. WO R K I N G PA P E R S E R I E S N O. 4 1 8 / N OV E M B E R The Eurosystem Inflation Persistence NetworkThis paper reflects research conducted within the Inflation Persistence Network (IPN), a team of Eurosystem economists undertaking joint research on inflation persistence in the euro area and in its member countries. The research of the IPN combines theoretical and empirical analyses using three data sources: individual consumer and producer prices; surveys on firms' price-setting practices; aggregated sectoral, national and area-wide price indices. Patterns, causes and policy implications of inflation persistence are addressed.The IPN is chaired by Ignazio Angeloni; Stephen Cecchetti (Brandeis University), Jordi Galí (CREI, Universitat Pompeu Fabra) and Andrew Levin (Board of Governors of the Federal Reserve System) act as external consultants and Michael Ehrmann as Secretary.The refereeing process is co-ordinated by a team composed of Vítor Gaspar (Chairman), Stephen Cecchetti, Silvia Fabiani, Jordi Galí, Andrew Levin, and Philip Vermeulen. The paper is released in order to make the results of IPN research generally available, in preliminary form, to encourage comments and suggestions prior to final publication. The views expressed in the paper are the author's own and do not necessarily reflect those of the Eurosystem. C O N T E N T S Abstract 4Non-technical summary 5

Real Rigidities and the Cross-Sectional Distribution of Price Stickiness: Evidence from Micro and Macro Data Combined

“…Also, unreported results with models with K < 8 suggest that one needs to allow for "enough" heterogeneity in order to avoid compromising the empirical performance of the model. In particular, the …t of models with K = 4 (as in Coenen et al 2007) is much worse than models with K = 6 or 8. While the di¤erences in empirical performance between models with K = 6 and K = 8 are not that large, the evidence against the speci…cations with K = 4 is quite strong: posterior odds ratios favor the models with K = 6; 8 by an order of 10 5 : 1.…”

“…Both models feature ex-post rather than ex-ante heterogeneity in nominal rigidities, as is the case in our model. 8 Coenen et al (2007) estimate a model with (limited) ex-ante heterogeneity in price contracts using only aggregate data. They focus on the estimate of the Ball-Romer index of real rigidities and on the average duration of contracts implied by their estimates, which they emphasize is in line with the results in Bils and Klenow (2004).…”

“…11 Thus, for a …rm kj that adjusts at time t and sets X t (k), the prices charged from t to t + k 1 satisfy:…”

“…More recently, Bonomo, Carvalho, Garcia, and Malta (2014) obtain a large contract multiplier in an estimated model with menu costs and partially costly information. 6 Several earlier papers in the literature combine structural equations with empirical speci…cations for other parts of the model (e.g., Sbordone 2002, Guerrieri 2006, and Coenen et al 2007). …”

Evaluating the German (New Keynesian) Phillips curve

“…Additionally, there is also disagreement on whether the inflation contains a lagged term (through backward looking behavior) or whether it is purely forward looking. A more rigorous treatment of nominal price rigidity in Germany is provided by Coenen, Levin and Christoffel (2007) that focuses on the interaction of real and IWH nominal rigidities. Their estimation technique relies on indirect inference methods.…”