Sticky Prices: An Empirical Assessment of Alternative Models

Author: Mr. Esteban Jadresic

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.

Volume/Issue: Volume 1999 Issue 072

Publication date: May 1999

ISBN: 9781451849325

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Topics covered in this book

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Business and Economics , Inflation , Economics- Macroeconomics , WP , nominal interest rate , Sticky prices , staggered price setting , United States , price duration , aggregate price , price decision , price setting , staggered price , rearranging terms , output equation , Inflation , Vector autoregression , Price elasticity , Price adjustments

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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.