Pricing Models: A Bayesian DSGE Approach for the U.S. Economy

Abstract

This paper compares and estimates three pricing mechanisms in the context of a small DSGE model of the U.S. economy. We interpret our results as favoring the pricing mechanism presented in Wolman (1999 Wolman model) over the New Keynesian model with indexation (Gali and Gertler 1999, Smets and Wouters 2004a) and the sticky information model of Mankiw and Reis (2002). The key factor that explains the performance of the Wolman model is that the data reject the key assumption of the New Keynesian model that the firm's probability of price change is constant over time and independent of the contract's vintage. Our results also show that incorporating indexation in the New Keynesian model represents a poor expedient in matching the autocorrelation function of the inflation process over the last 20 years. Copyright 2007 The Ohio State University.

Natural rate measures in an estimated DSGE model of the U.S. economy

“…We find only a modest role for lagged inflation in our adjustment cost specification (around 1 3 ), equivalent to modest indexation to lagged inflation in other sticky-price specifications. This differs from some other estimates, perhaps because of the focus on a more recent post-1983 sample (similar to results in Kiley, 2007b andLaforte, 2007).…”

How relevant are nominal contracting schemes for monetary policy?

“…; 9; a 10 ¼ 1 J ¼ 10 Taylor a ¼ ð0; 0; 0; 1Þ J ¼ 4: 9 One could take this approach one step further and estimate the parameters separately for each model and then draw from the posterior parameter distribution. However, evidence in Paustian and Pytlarczyk (2005) as well as Laforte (2007) suggests that most structural parameters are estimated at similar values across different contracting schemes. mean of the distribution, Calvo contracts involve 4% larger costs than truncated Calvo contracts, 14% larger costs than Wolman contracts and 46% larger costs than Taylor contracts.…”

“…Finally, while alternative pricing and wage setting schemes are associated with different welfare costs, the welfare ranking of alternative monetary policy rules is very robust to changes in the mechanism generating nominal rigidities in the 1 See the recent work by Laforte (2007) for the empirical macro evidence on alternative pricing schemes. The work of the European Central Bank's Inflation Persistence Network summarized in Angeloni et al (2007) presents further empirical evidence on price stickiness.…”

Inflation Target Shocks and Monetary Policy Inertia in the Euro Area

“…As in Coenen et al (2008), Edge et al (2007), and Laforte (2007), a y is the degree of responsiveness to the deviations of output growth from its steady state value. The inflation target itself is assumed to evolve according to…”