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

26 Pages Posted: 19 Dec 2010

Date Written: November 15, 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, 40, 40, 30

Suggested Citation

Alvarez, Luis J. and Burriel, Pablo, Micro-Based Estimates of Heterogeneous Pricing Rules: The United States vs. The Euro Area (November 15, 2010). Scandinavian Journal of Economics, Vol. 112, Issue 4, pp. 697-722, 2010, Available at SSRN: https://ssrn.com/abstract=1727885 or http://dx.doi.org/10.1111/j.1467-9442.2010.01619.x

Luis J. Alvarez (Contact Author)

Banco de España

Alcala 50
Madrid 28014
Spain

Pablo Burriel

Banco de España ( email )

Madrid 28014
Spain

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