Price Stickiness and Intermediate Materials Prices

Ahmed Pirzada

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: The standard New Keynesian model requires large degree of price stickiness to match observed inflation dynamics. This is contrary to micro-evidence on prices. This paper addresses this criticism of the standard model. Firstly, the price mark-up shock is replaced with a sector-specific intermediate input-price shock. Secondly, survey data on long-term inflation expectations are also used when estimating the new model. Estimation results show that marginal costs in the model with intermediate materials are stable unlike in the model without. As a result, the new model does not require a large degree of price stickiness to match marginal costs and observed inflation. The model is estimated for both the US and the Euro area, thus showing that this result is not specific to the US only.

Pages: 41 pages.
Date: 2017-08-01
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:17/686

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