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Ricardo J Caballero - One of the best experts on this subject based on the ideXlab platform.
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Price Stickiness in ss models new interpretations of old results
Journal of Monetary Economics, 2007Co-Authors: Ricardo J Caballero, Eduardo EngelAbstract:Abstract What is the relation between infrequent Price adjustment and the dynamic response of the aggregate Price level to monetary shocks? The answer to this question ranges from a one-to-one link [Calvo, G., 1983. Prices in a utility maximizing framework. Journal of Monetary Economics 12, 383–398] to no connection whatsoever [Caplin, A., Spulber, D., 1987. Menu costs and the neutrality of money. Quarterly Journal of Economics 102, 703–726]. The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we propose new interpretations of key results in this area, which in turn suggest the kind of Ss model that is likely to generate substantial Price rigidity. Among these new interpretations, we revisit Caplin and Spulber's monetary neutrality result. We show that when Price Stickiness is measured in terms of the impulse response function, this result is not a consequence of aggregation, as is often assumed, but is due instead to the absence of Price Stickiness at the microeconomic level. We also show that the “selection effect,” according to which units that adjust their Prices are those that benefit the most, is neither necessary nor sufficient to account for the higher aggregate flexibility of Ss -type models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate Price response. The aggregate Price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.
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Price Stickiness in ss models new interpretations of old results
Research Papers in Economics, 2007Co-Authors: Ricardo J Caballero, Eduardo EngelAbstract:What is the relation between infrequent Price adjustment and the dynamic response of the aggregate Price level to monetary shocks? The answer to this question ranges from a one-to-one link (Calvo, 1983) to no connection whatsoever (Caplin and Spulber, 1987). The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we propose new interpretations of key results in this area, which in turn suggest the kind of Ss model that is likely to generate substantial Price rigidity. The first result we revisit is Caplin and Spulber's monetary neutrality model. We show that when Price Stickiness is measured in terms of the impulse response function, this result is not a consequence of aggregation, but is due instead to the absence of Price-Stickiness at the microeconomic level. We also show that the “selection effect,” according to which units that adjust their Prices are those that benefit the most, is neither necessary nor sufficient to account for the higher aggregate flexibility of Ss-type models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate Price response. The aggregate Price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.
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Price Stickiness in ss models new interpretations of old results
Social Science Research Network, 2007Co-Authors: Ricardo J Caballero, Eduardo EngelAbstract:What is the relation between infrequent Price adjustment and the dynamic response of the aggregate Price level to monetary shocks? The answer to this question ranges from a one-to-one link (Calvo, 1983) to no connection whatsoever (Caplin and Spulber, 1987). The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we propose new interpretations of key results in this area, which in turn suggest the kind of Ss model that is likely to generate substantial Price rigidity. The first result we revisit is Caplin and Spulber's monetary neutrality model. We show that when Price Stickiness is measured in terms of the impulse response function, this result is not a consequence of aggregation, but is due instead to the absence of Price-Stickiness at the microeconomic level. We also show that the "selection effect," according to which units that adjust their Prices are those that benefit most, is neither necessary nor sufficient to account for the higher aggregate flexibility of Ss-type models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate Price response. The aggregate Price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.
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Price Stickiness in ss models new interpretations for old results
Research Papers in Economics, 2007Co-Authors: Eduardo Engel, Ricardo J CaballeroAbstract:What is the relation between infrequent Price adjustment and the dynamic response of the aggregate Price level to monetary shocks? The answer to this question ranges from a one-to-one link (Calvo, 1983) to no connection whatsoever (Caplin and Spulber, 1987). The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we provide new interpretations of key results in this area. In particular, when Price Stickiness is measured in terms of the impulse response function, the monetary neutrality result of Caplin and Spulber is not a consequence of aggregation, as is often assumed, but is due instead to properties of the microeconomic impulse response function. We also show that the ”selection effect,” according to which units that adjust their Prices are those that benefit the most, is an important feature of Ss-type models but is neither necessary nor sufficient to account for the higher aggregate flexibility of these models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate Price response. The aggregate Price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.
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Price Stickiness in ss models basic properties
2006Co-Authors: Ricardo J CaballeroAbstract: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 proportionally less so than in Calvo-type models.
Hashmat Khan - One of the best experts on this subject based on the ideXlab platform.
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new phillips curve under alternative production technologies for canada the united states and the euro area
European Economic Review, 2005Co-Authors: Edith Gagnon, Hashmat KhanAbstract:Abstract This paper shows that alternative production technologies imply two modifications to the New Phillips Curve (NPC): A specific ‘strategic complementarity parameter’ that affects the relationship between real marginal cost and inflation and a specific modification to the labour share measure of real marginal cost. Estimates of average duration of nominal Price Stickiness obtained conditional on the strategic complementarity parameter are substantially smaller, and therefore more plausible, relative to when this parameter is ignored. Modifications to the marginal cost measure alone have little effect on the NPC estimates. The empirical fit of the NPC under alternative production technologies is similar.
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Price Stickiness trend inflation and output dynamics a cross country analysis
Canadian Journal of Economics, 2004Co-Authors: Hashmat KhanAbstract: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.
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Price Stickiness trend inflation and output dynamics a cross country analysis
Social Science Research Network, 2004Co-Authors: Hashmat KhanAbstract:Sticky Price models based on menu costs predict that countries with high trend inflation should have (i) smaller impact effects of demand shocks on output and (ii) less persistent output fluctuations, relative to low-trend inflation countries. These predictions are tested, controlling for changes in trend inflation, using a country-specific approach. The results do not support the second prediction. That prediction is also not robust to a modified measure of trend inflation that excludes episodes of hyperinflation. These findings suggest that while Price Stickiness is important for understanding short-run impact effects, real propagation mechanisms may drive persistence in output fluctuations.
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endogenous Price Stickiness trend inflation and the new keynesian phillips curve
Social Science Research Network, 2003Co-Authors: Hasan Bakhshi, Pablo Burrielllombart, Hashmat Khan, Barbara RudolfAbstract:For standard calibration, this paper shows that the optimal Price, in a model with Calvo form of Price Stickiness and strategic complementarities, is only defined for annualised trend inflation rates of under 5.5%. This critical inflation rate is below the average inflation rate over recent decades. Furthermore, over the range for which the optimal Price is defined, the slope of the New Keynesian Phillips curve generated by this model is decreasing in trend inflation. That contradicts the stylised fact that Phillips curves are flatter in low-inflation environments. Substituting endogenous Price Stickiness for the Calvo form of time-dependent pricing can help avoid these implications.
Yuriy Gorodnichenko - One of the best experts on this subject based on the ideXlab platform.
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are sticky Prices costly evidence from the stock market
The American Economic Review, 2016Co-Authors: Yuriy Gorodnichenko, Michael WeberAbstract:We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier Prices than for firms with more flexible Prices. This differential reaction is economically large and strikingly robust to a broad array of checks. These results suggest that menu costs—broadly defined to include physical costs of Price adjustment, informational frictions, etc.—are an important factor for nominal Price rigidity at the micro level. We also show that our empirical results are qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models in which firms have heterogeneous Price Stickiness. (JEL E12, E31, E43, E44, E52, G12, L11)
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are sticky Prices costly evidence from the stock market
Social Science Research Network, 2015Co-Authors: Yuriy Gorodnichenko, Michael WeberAbstract:We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier Prices than for firms with more flexible Prices. This differential reaction is economically large and strikingly robust to a broad array of checks. These results suggest that menu costs - broadly defined to include physical costs of Price adjustment, informational frictions, etc. - are an important factor for nominal Price rigidity at the micro level. We also show that our empirical results are qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models in which firms have heterogeneous Price Stickiness.
Carlos Carvalho - One of the best experts on this subject based on the ideXlab platform.
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the cross sectional distribution of Price Stickiness implied by aggregate data
The Review of Economics and Statistics, 2020Co-Authors: Carlos Carvalho, Niels Arne Dam, Jae Won LeeAbstract:We provide evidence on three mechanisms that can reconcile frequent individual Price changes with sluggish aggregate Price dynamics. To that end, we estimate a semistructural model that can extract...
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selection and monetary non neutrality in time dependent pricing models
Journal of Monetary Economics, 2015Co-Authors: Carlos Carvalho, Felipe SchwartzmanAbstract:For a given frequency of Price adjustment, monetary non-neutrality is smaller if older Prices are disproportionately more likely to change. Selection for the age of Prices provides a complete characterization of Price-setting frictions in time-dependent models. Selection for older Prices is weaker and non-neutralities are larger if the hazard function of Price adjustment is less strongly increasing. Selection is weaker if there is heterogeneity in Price Stickiness. Finally, selection is weaker if durations of Price spells are more variable. In particular, the Taylor (1979) model exhibits maximal selection for older Prices, whereas the Calvo (1983) model exhibits no selection.
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real rigidities and the cross sectional distribution of Price Stickiness evidence from micro and macro data combined
Textos para discussão, 2014Co-Authors: Carlos Carvalho, Niels Arne Dam, Jae Won LeeAbstract:We use a standard sticky-Price model to provide evidence on three mechanisms that can reconcile somewhat frequent Price changes with large and persistent real effects of monetary shocks. To that end, we estimate a semi-structural model for the U.S. economy that allows for varying degrees of real rigidities, and cross-sectional heterogeneity in Price Stickiness. The model can extract some information about these two features of the economy from aggregate data, and discriminate between different distributions of Price Stickiness. Hence it can also speak to the debate about the role of sales and other temporary Price changes in shaping the effects of monetary policy. Employing a Bayesian approach, we combine macroeconomic time-series data with information about empirical distributions of Price Stickiness derived from micro Price data for the U.S. economy. Our estimates point to the presence of both large real rigidities and an important degree of heterogeneity in Price Stickiness. Moreover, cross-sectional distributions of Price Stickiness that factor out sales improve the empirical fit of the model. Our results suggest that bridging the gap between micro and macro evidence on nominal Price rigidity may require the combination of several mechanisms.
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the cross sectional distribution of Price Stickiness implied by aggregate data
Social Science Research Network, 2010Co-Authors: Carlos Carvalho, Niels Arne DamAbstract:Using only aggregate data as observables, we estimate multi-sector 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 U.S., 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.
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estimating the cross sectional distribution of Price Stickiness from aggregate data
Staff Reports, 2009Co-Authors: Carlos Carvalho, Niels Arne DamAbstract:We estimate a multisector sticky-Price model for the U.S. economy in which the degree of Price Stickiness is allowed to vary across sectors. For this purpose, 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 stickier are relatively more important in determining the low-frequency response. Estimating the model using only aggregate data on nominal and real output, we find that the inferred distribution of Price Stickiness is strikingly similar to the empirical distribution constructed from the recent microeconomic evidence on Price setting in the U.S. economy. We also provide macro-based estimates of the underlying distribution for ten other countries. Finally, we explore our Bayesian approach to combine the aggregate time-series data with the microeconomic information on the distribution of Price rigidity. 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 microeconomic data on Price Stickiness.
Eduardo Engel - One of the best experts on this subject based on the ideXlab platform.
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Price Stickiness in ss models new interpretations of old results
Journal of Monetary Economics, 2007Co-Authors: Ricardo J Caballero, Eduardo EngelAbstract:Abstract What is the relation between infrequent Price adjustment and the dynamic response of the aggregate Price level to monetary shocks? The answer to this question ranges from a one-to-one link [Calvo, G., 1983. Prices in a utility maximizing framework. Journal of Monetary Economics 12, 383–398] to no connection whatsoever [Caplin, A., Spulber, D., 1987. Menu costs and the neutrality of money. Quarterly Journal of Economics 102, 703–726]. The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we propose new interpretations of key results in this area, which in turn suggest the kind of Ss model that is likely to generate substantial Price rigidity. Among these new interpretations, we revisit Caplin and Spulber's monetary neutrality result. We show that when Price Stickiness is measured in terms of the impulse response function, this result is not a consequence of aggregation, as is often assumed, but is due instead to the absence of Price Stickiness at the microeconomic level. We also show that the “selection effect,” according to which units that adjust their Prices are those that benefit the most, is neither necessary nor sufficient to account for the higher aggregate flexibility of Ss -type models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate Price response. The aggregate Price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.
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Price Stickiness in ss models new interpretations of old results
Research Papers in Economics, 2007Co-Authors: Ricardo J Caballero, Eduardo EngelAbstract:What is the relation between infrequent Price adjustment and the dynamic response of the aggregate Price level to monetary shocks? The answer to this question ranges from a one-to-one link (Calvo, 1983) to no connection whatsoever (Caplin and Spulber, 1987). The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we propose new interpretations of key results in this area, which in turn suggest the kind of Ss model that is likely to generate substantial Price rigidity. The first result we revisit is Caplin and Spulber's monetary neutrality model. We show that when Price Stickiness is measured in terms of the impulse response function, this result is not a consequence of aggregation, but is due instead to the absence of Price-Stickiness at the microeconomic level. We also show that the “selection effect,” according to which units that adjust their Prices are those that benefit the most, is neither necessary nor sufficient to account for the higher aggregate flexibility of Ss-type models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate Price response. The aggregate Price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.
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Price Stickiness in ss models new interpretations of old results
Social Science Research Network, 2007Co-Authors: Ricardo J Caballero, Eduardo EngelAbstract:What is the relation between infrequent Price adjustment and the dynamic response of the aggregate Price level to monetary shocks? The answer to this question ranges from a one-to-one link (Calvo, 1983) to no connection whatsoever (Caplin and Spulber, 1987). The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we propose new interpretations of key results in this area, which in turn suggest the kind of Ss model that is likely to generate substantial Price rigidity. The first result we revisit is Caplin and Spulber's monetary neutrality model. We show that when Price Stickiness is measured in terms of the impulse response function, this result is not a consequence of aggregation, but is due instead to the absence of Price-Stickiness at the microeconomic level. We also show that the "selection effect," according to which units that adjust their Prices are those that benefit most, is neither necessary nor sufficient to account for the higher aggregate flexibility of Ss-type models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate Price response. The aggregate Price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.
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Price Stickiness in ss models new interpretations for old results
Research Papers in Economics, 2007Co-Authors: Eduardo Engel, Ricardo J CaballeroAbstract:What is the relation between infrequent Price adjustment and the dynamic response of the aggregate Price level to monetary shocks? The answer to this question ranges from a one-to-one link (Calvo, 1983) to no connection whatsoever (Caplin and Spulber, 1987). The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we provide new interpretations of key results in this area. In particular, when Price Stickiness is measured in terms of the impulse response function, the monetary neutrality result of Caplin and Spulber is not a consequence of aggregation, as is often assumed, but is due instead to properties of the microeconomic impulse response function. We also show that the ”selection effect,” according to which units that adjust their Prices are those that benefit the most, is an important feature of Ss-type models but is neither necessary nor sufficient to account for the higher aggregate flexibility of these models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate Price response. The aggregate Price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.
