Sticky Prices: An Empirical Assessment of Alternative Models
May 1, 1999
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Summary
This paper presents a model of staggered price setting that allows for a flexible distribution of the durations of the prices underlying aggregate price behavior, and estimates it with U.S. data. When tested against an unrestricted version of this model, standard models of sticky prices are rejected. In contrast, a stylized model that assumes a trimodal distribution of price durations—with clusters on the first, fourth, and eighth quarter after prices are set—easily passes the same test. In addition, this model is able to replicate the dynamic behavior of inflation and output found in the data.
Subject: Econometric analysis, Inflation, Inflation persistence, Price adjustments, Price elasticity, Prices, Sticky prices, Vector autoregression
Keywords: aggregate price, Inflation, nominal interest rate, output equation, Price adjustments, price decision, price duration, Price elasticity, price setting, rearranging terms, staggered price, staggered price setting, Sticky prices, United States, Vector autoregression, WP
Pages:
28
Volume:
1999
DOI:
Issue:
072
Series:
Working Paper No. 1999/072
Stock No:
WPIEA0721999
ISBN:
9781451849325
ISSN:
1018-5941
