Is Rotemberg Pricing Justified by Macro Data?

8 Pages Posted: 12 Oct 2016 Last revised: 13 Nov 2016

Alexander W. Richter

Federal Reserve Bank of Dallas

Nathaniel A. Throckmorton

College of William and Mary

Date Written: October 7, 2016

Abstract

Structural models used to study monetary policy often include sticky prices. Calvo pricing is more common but Rotemberg pricing has become popular due to its computational advantage. To determine whether the data supports that change, we estimate a nonlinear New Keynesian model with a zero lower bound (ZLB) constraint and each type of sticky prices. The models produce similar parameter estimates and the filtered shocks are nearly identical when the Fed was not constrained, but the Rotemberg model has a higher marginal data density and it endogenously generates more volatility at the ZLB, which helps explain data from 2008-2011.

Keywords: Bayesian Estimation, Calvo Pricing, Rotemberg Pricing, Zero Lower Bound

JEL Classification: C11, E43, E58

Suggested Citation

Richter, Alexander W. and Throckmorton, Nathaniel A., Is Rotemberg Pricing Justified by Macro Data? (October 7, 2016). Economics Letters, Vol. 149, 2016. Available at SSRN: https://ssrn.com/abstract=2850502

Alexander W. Richter

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5360 (Phone)

HOME PAGE: http://alexrichterecon.com

Nathaniel A. Throckmorton (Contact Author)

College of William and Mary ( email )

P.O. Box 8795
Williamsburg, VA 23187
United States

HOME PAGE: http://nathrockmorton.people.wm.edu/

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