Sticky-Price Models and the Natural Rate Hypothesis

FRB of St. Louis Working Paper No. 2005-018A

36 Pages Posted: 29 Jul 2005

See all articles by Javier Andrés

Javier Andrés

University of Valencia - Department of Economics

David Lopez-Salido

Board of Governors of the Federal Reserve System

Edward Nelson

Board of Governors of the Federal Reserve System

Date Written: March 2005

Abstract

A major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state. In this paper we estimate a dynamic optimizing business cycle model whose price-setting behavior satisfies the natural rate hypothesis. The price-adjustment specifications we consider are the sticky-information specification of Mankiw and Reis (2002) and the indexed contracts of Christiano, Eichenbaum, and Evans (2005). Our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen. Consequently, the alternative model specifications deliver similar estimates of the U.S. output gap series, but the empirical behavior of the gap series differs substantially from standard gap estimates.

JEL Classification: E31, E52

Suggested Citation

Andrés, Javier and Lopez-Salido, David and Nelson, Edward, Sticky-Price Models and the Natural Rate Hypothesis (March 2005). FRB of St. Louis Working Paper No. 2005-018A. Available at SSRN: https://ssrn.com/abstract=762567 or http://dx.doi.org/10.2139/ssrn.762567

Javier Andrés

University of Valencia - Department of Economics ( email )

E-46022 Valencia, Valencia E-46022
Spain
(34 96) 382 8260 (Phone)
(34 96) 382 8249 (Fax)

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Edward Nelson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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