Micro-Based Estimates of Heterogeneous Pricing Rules: The United States vs. The Euro Area

Abstract:     
This paper presents US and euro area estimates for a fully heterogeneous model, in which there is a continuum of firms setting prices with a constant probability of adjustment, which may differ from firm to firm. The estimated model accurately matches the empirical distribution function of individual price durations for the US and the euro area. Incorporating these micro based pricing rules into a DSGE model, we find that nominal shocks have a greater real impact in the fully heterogeneous economy than in the standard Calvo model. We also find that nominal and real shocks bring about a reallocation of resources among sectors. Monetary policy is found to have a greater real impact in the euro area than in the United States.

Number of Pages in PDF File: 35

Keywords: price setting, heterogeneity, DSGE, Calvo model

JEL Classification: C40, D40, E30

working papers series