DP7339 Sectoral Price Data and Models of Price Setting

Author(s): Bartosz Adam Mackowiak, Emanuel Moench, Mirko Wiederholt
Publication Date: June 2009
Keyword(s): Bayesian dynamic factor model, Calvo model, menu cost, rational inattention, sticky information
JEL(s): C11, D21, D83, E31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7339

We estimate impulse responses of sectoral price indexes to aggregate shocks and to sector-specific shocks. In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock. The standard Calvo model and the standard sticky-information model can match this finding only under extreme assumptions concerning the profit-maximizing price. The rational-inattention model of Ma´ckowiak and Wiederholt (2009a) can match this finding without an extreme assumption concerning the profit-maximizing price. Furthermore, there is little variation across sectors in the speed of response of sectoral price indexes to sector-specific shocks. The rational-inattention model matches this finding, while the Calvo model predicts too much cross-sectional variation.