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

35 Pages Posted: 1 Jul 2010  

Luis J. Álvarez

Banco de España

Pablo Burriel

Banco de España

Multiple version iconThere are 2 versions of this paper

Date Written: June 29, 2010

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.

Keywords: price setting, heterogeneity, DSGE, Calvo model

JEL Classification: C40, D40, E30

Suggested Citation

Álvarez, Luis J. and Burriel, Pablo, Micro-Based Estimates of Heterogeneous Pricing Rules: The United States vs. The Euro Area (June 29, 2010). Banco de Espana Working Paper No. 1019. Available at SSRN: https://ssrn.com/abstract=1632335 or http://dx.doi.org/10.2139/ssrn.1632335

Luis J. Álvarez (Contact Author)

Banco de España ( email )

Madrid 28014
Spain

Pablo Burriel

Banco de España ( email )

Madrid 28014
Spain

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