Sectoral Price Rigidity and Aggregate Dynamics

SSRN Electronic Journal, 2000

We develop a multi-sector sticky-price DSGE model that can endogenously deliver di¤erential responses of prices to aggregate and sectoral shocks. Input-output production linkages induce across-sector pricing complementarities that contribute to a slow response of prices to aggregate shocks. In turn, labor-market segmentation at the sectoral level induces within-sector pricing substitutability, which helps the model deliver a fast response of prices to sector-speci…c shocks. Estimating the Factor Augmented Vector Autoregression speci…cation of Boivin, Giannoni and Mihov (2009) on data generated by a parameterized version of our model, we …nd results that resemble what they obtain with disaggregated data for the U.S. economy. We then employ Bayesian methods to estimate the model using aggregate and sectoral data, and …nd that it accounts extremely well for a wide range of sectoral price facts.

SSRN Electronic Journal, 2014

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Journal of Economic Dynamics and Control, 2013

This paper explores how a monetary regime change affects headline inflation via differential effects on various sectors in the economy. Using disaggregated CPI data for Canada, we find that the response to the adoption of inflation targeting (IT) was quite heterogeneous across sectors. While sticky-price sectors experienced a notable change in inflation dynamics following IT adoption, little structural change was observed in flexible price sectors. Our analysis based on a common factor model suggests that the structural changes in the sticky price sectors are driven by a decline in their responses to common aggregate shocks, including a monetary shock.

2007

This paper investigates the relative importance of shocks to total factor productivity (TFP) versus the marginal efficiency of investment (MEI) in explaining cyclical variations. The literature offers contrasting results: TFP shocks are important in neoclassical environments, while relatively unimportant in neo-Keynesian environments. A model with endogenous capital utilization captures both results depending upon the degree of nominal rigidity. In the model, MEI shocks create a wedge between the nominal returns on bonds and capital. Nominal rigidities activate this wedge and place the relative importance on MEI shocks, while TFP shocks dominate when prices are perfectly flexible.

SSRN Electronic Journal, 2019

In this paper I develop a multi-sector model with price frictions, production networks, trend inflation and different types of shocks to study how these conditions affect the properties of inflation and their implications for monetary policy. Calibrating the model to the U.S. economy my results show that in this setting inflation becomes 30% less sensitive to the output-gap compared to a standard one-sector model. Furthermore, in the multi-sector model inflation is affected by sectoral variables linked to between-sector and within-sector price distortions. This fact adds inertia to the inflationary process and makes monetary policy less effective. Additionally, the welfare costs of trend inflation increase by one order of magnitude in the multi-sector model compared to the standard one-sector model. The amplification is quantitatively explained by between-sector rather than within-sector price distortions. This suggests that one-sector models and models without heterogeneity underestimate the costs of long-run inflation and the efficacy of monetary policy to fight inflation.

Review of Economic Dynamics, 2004

We use large unpublished data set about the prices by store of 381 products collected by the Israeli bureau of statistics during 1991-92 in the process of computing the CPI. On average 24% of the stores changed their price where the average is over products and months. Using the standard calculation this would imply that on average prices remain unchanged for 4.1 months. We argue that the standard calculation suffers from a large aggregation bias due to Jensen's inequality and our best estimate suggests that prices remain unchanged on average for more than 7.5 months. We then assess the importance of price rigidity in generating price dispersion. We find no evidence that price rigidity as measured by the frequency of nominal price changes is related to price dispersion. We also find no evidence that a shock to the inflation rate increases price dispersion. These findings are not consistent with standard versions of the staggered price setting model but are roughly consistent with a simple version of the uncertain and sequential trade model.

We present a model embodying moderate amounts of nominal rigidities that accounts for the observed inertia in inflation and persistence in output. The key features of our model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these features, the most important are staggered wage contracts that have an average duration of three quarters and variable capital utilization.

RePEc: Research Papers in Economics, 2009

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 heterogeneity-in particular for prices in some sectors to last beyond one year-is crucial to avoid producing estimates that imply too little average nominal rigidity at the expense of too much real rigidity, relative to the speci…cation of the model favored by the 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.

Policy Research Working Papers, 1999