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Price setting in a model with production chains : evidence from sectoral data

Author: Maral Shamloo; IMF Institute,
Publisher: [Washington, D.C.] : International Monetary Fund, ©2010.
Series: IMF working paper, WP/10/82.
Edition/Format:   eBook : Document : International government publication : EnglishView all editions and formats
Database:WorldCat
Summary:
Reconciling the high frequency of price changes at the micro level and their apparent rigidity at the aggregate level has been the subject of considerable debate in macroeconomics recently. In this paper I show that incorporating production chains in a standard New- Keynesian model replicates two stylized facts about the data. First, sectoral prices respond with significantly different speeds to aggregate shocks.  Read more...
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Details

Genre/Form: Electronic books
Material Type: Document, Government publication, International government publication, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Maral Shamloo; IMF Institute,
ISBN: 1282845802 9781282845800
OCLC Number: 698585642
Description: 1 online resource (50 pages) : color illustrations.
Contents: Cover13; --
Introduction --
Model --
Households --
Firms --
Market Clearing --
Firms' Price Setting --
Monetary Policy and Shocks --
Linearized Steady State --
Calibration --
A Two-Sector Example --
The Multi-Sector Model --
Discussion of results --
Empirical Evidence --
Identification of Shocks and Impulse Responses --
Data --
Regressions --
Conclusions --
Results in the Presence of Wage Rigidity --
Long-run Response of Prices to an Aggregate Technology Shock --
Monetary Policy and Oil Price Shock FAVAR --
Identifying Monetary Policy Shocks --
Identifying Oil Price Shocks --
References.
Series Title: IMF working paper, WP/10/82.
Responsibility: prepared by Maral Shamloo.

Abstract:

Reconciling the high frequency of price changes at the micro level and their apparent rigidity at the aggregate level has been the subject of considerable debate in macroeconomics recently. In this paper I show that incorporating production chains in a standard New- Keynesian model replicates two stylized facts about the data. First, sectoral prices respond with significantly different speeds to aggregate shocks. Meanwhile, the responses to sectorspecific shocks are similar. Second, the standard price setting models are unable to quantitatively match the amount of monetary non-neutrality observed in the data. I argue, First, that the input-output linkages in production generate different responses to aggregate shocks across sectors. Second, calibrating this model to the US data can create five times more monetary non-neutrality in response to nominal shocks compared to an equivalent homogeneous economy with intermediate inputs. Finally, the model implies that upstream industries respond faster to aggregate shocks compared to downstream industries. I show that this prediction is supported by the data.

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