Price stickiness in models: New interpretations of old results (original) (raw)
Related papers
Price stickiness in Ss models: basic properties
What is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks? Caplin and Spulber (1987) provide a stark example where the answer is "none." It is well known that by relaxing their limit assumptions some price stickiness is regained but, to our knowledge, there are no general results on this issue. In this paper we study the relation between the frequency of microeconomic adjustment and aggregate price flexibility in a generalized Ss setup. We show that for a wide class of Ss models, the aggregate price level is approximately three times as flexible as the frequency of microeconomic price adjustment. This rule of thumb carries over to the cyclical variation in aggregate flexibility: The degree of price flexibility varies three times as much as the frequency of microeconomic adjustment over the business cycle. We also show that in generalized Ss models, strategic complementarities reduce aggregate price flexibility for any given frequency of microeconomic price adjustment, but less so than in Calvo-type models.
Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks
Frontiers in Macroeconomics, 2006
There is ample evidence that the frequency of price adjustments differs substantially across sectors. This paper introduces sectoral heterogeneity in price stickiness into an otherwise standard sticky price model to study how it affects the dynamics of monetary economies. Qualitative and quantitative results from a realistic calibration for the U.S. economy show that monetary shocks tend to have larger and more persistent real effects in heterogeneous economies, when compared to identical-firms economies with similar degrees of nominal and real rigidity. In the presence of strategic complementarities in price setting, sectors with lower frequencies of price adjustment have a disproportionate effect on the aggregate price level. In order to better approximate the dynamics of the calibrated heterogeneous economy, an identical-firms model requires a frequency of price changes that is up to three times lower than the average of the heterogeneous economy. * I would like to thank
SSRN Electronic Journal, 2014
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Monetary equilibrium and price stickiness: A rejoinder
The Review of Austrian Economics, 2012
Luther and Salter argue for a regime where aggregate demand is restored by an increase in the money supply in response to an increase in the demand for money. They claim that, 1) monetary equilibrium policy prescriptions do not necessarily rely on sticky prices, 2) Cantillon effects can be neglected without consequence, 3) wealth redistributions from monetary policy are unimportant, 4) monetary disequilibrium theorists strive for a stable price level, 5) fewer price adjustments are necessary in their proposed regime, 6) savings and saving are equivalent, 7) changes in the composition of savings do not alter time preference, and, 8) in the proposed regime economic calculation is easier than in a 100 percent reserve system . All these claims are false. They furthermore misconstrue us as preferring negative quantity adjustments to positive price adjustments. This too is false.
Price Stickiness, Inflation, and
2000
The sticky-price model of aggregate fluctuations implies that countries with high trend inflation rates should exhibit less-persistent output fluctuations than countries with low trend inflation. I conduct a crosscountry analysis of output persistence and inflation that takes into account the within-country time variation in trend inflation. My results do not support the implication. The results suggest that further research is needed before models based on nominal price stickiness can offer a complete microfoundation for persistent effects of aggregate demand shocks.
Annals of Economics and Finance, 2009
We accomplish two tasks to characterize aggregate price stickiness in this paper. First, we endogenize β, the fraction of the firms keeping their price unchanged following a money supply shock in the near-rationality model (Akerlof and Yellen, 1985) by introducing a distribution of price-adjustment barriers among the firms into the near-rationality model. Second, as β can be considered an indicator of aggregate price stickiness by its definition, the endogenized β enables us to characterize aggregate price stickiness by studying its properties. We show that: (1) lim ε→0 β(ε) = 1; (2) dβ dε˛ε =0 = 0; and (3) the possibility of multiple equilibrium values of β, where ε is the fraction change in money supply. for helpful discussions and valuable comments.
Why are some prices stickier than others? Firm-data evidence on price adjustment lags
Infrequent price changes at the …rm level are now well documented in the literature. However, a number of issues remain partly unaddressed. This paper contributes to the literature on price stickiness by investigating the lags of price adjustments to di¤erent types of shocks. We …nd that adjustment lags to cost and demand shocks vary with …rm characteristics, namely the …rm's cost structure, the type of pricing policy, and the type of good. We also document that …rms react asymmetrically to demand and cost shocks, as well as to positive and negative shocks, and that the degree and direction of the asymmetry varies across …rms. JEL classi…cation codes: C41, D40, E31. Niemann and Pedro Portugal for helpful discussions and useful suggestions. The opinions expressed in this paper are those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem. Any errors and omissions are the sole responsibility of the authors.
2015
We estimate sticky-price models for the U.S. economy in which the degree of price stickiness is allowed to vary across sectors. Perhaps surprisingly, we use only aggregate data on nominal and real output. In our models, identi cation of the cross-sectional distribution of price stickiness is made possible by the fact that di¤erent sectors are relatively more important in determining the response of aggregate variables to shocks at di¤erent frequencies. We nd that the distribution of price stickiness inferred from aggregate data is strikingly similar to the distribution obtained from the recent empirical literature on microeconomic aspects of price setting in the U.S. economy. We also employ a Bayesian approach to combine time-series data on aggregate nominal and real output with such microeconomic information. Our results show that heterogeneity in price stickiness is of critical importance for understanding the joint dynamics of output and prices. Moreover, allowing for enough het...
The Cross-Sectional Distribution of Price Stickiness Implied by Aggregate Data
Using only aggregate data as observables, we estimate multisector sticky-price models for twelve countries, allowing the degree of price stickiness to vary across sectors. We use a specification that allows us to extract information about the underlying cross-sectional distribution from aggregate data. Identification is possible because sectors play different roles in determining the response of aggregate variables to shocks at different frequencies: sectors where prices are more sticky are relatively more important in determining the low-frequency response. We find that the inferred distributions of price stickiness conform quite well with empirical distributions constructed from the available microeconomic evidence on price setting. We then explore our Bayesian approach to combine the aggregate time-series data with the microeconomic information on the distributions of price rigidity, and re-estimate the models for the United States, Denmark, and Japan. Our results show that allowing for this type of heterogeneity is critically important to understanding the joint dynamics of output and prices, and it constitutes a step toward reconciling the extent of nominal price rigidity implied by aggregate data with the evidence from price micro data.
Monetary equilibrium and price stickiness: Causes, consequences and remedies
The Review of Austrian Economics, 2011
We reassess monetary equilibrium theory by focusing on its foundation -price stickiness -and answer several ancillary questions. Prices are sticky at times. Contra monetary equilibrium theorists, this is not a reason to advocate an issuance of fiduciary media to counteract the effects of a sluggish price adjustment process. Issuances of fiduciary media will breed negative effects, primarily via wealth redistributions, faulty interest rate signals and exacerbated business cycles. Allowing the price level to adjust to maintain monetary equilibrium provides for fewer detrimental effects than adjusting the supply of credit.