The Cross-Sectional Distribution of Price Stickiness Implied by Aggregate Data
Pontifical Catholic University of Rio de Janeiro (PUC-Rio)
Niels Arne Dam
August 20, 2010
Using only aggregate data as observables, we estimate multi-sector 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 U.S., 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.
Number of Pages in PDF File: 53
Keywords: heterogeneity, price stickiness, micro data, macro data, Bayesian estimation
JEL Classification: E10, E30working papers series
Date posted: November 17, 2008 ; Last revised: September 12, 2010
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