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Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks
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Carlos Carvalho
Published/Copyright:
December 20, 2006
Abstract
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.
Published Online: 2006-12-20
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Keywords for this article
heterogeneity;
price stickiness;
aggregation;
persistence;
new Keynesian Phillips curve
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- Frontiers Article
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- Advances Article
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- Quantifying the Effects of the Demographic Transition in Developing Economies
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- Convergence and Stability in U.S. Employment Rates
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- Does Inflation Grease the Wheels of the Labor Market?
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- A Search-Theoretic Monetary Business Cycle Model with Capital Formation
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