Reconciling Microeconomic and Macroeconomic Estimates of Price Stickiness

Adam Cagliarini, Tim Robinson and Allen Tran
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Adam Cagliarini: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: This paper attempts to reconcile the high estimates of price stickiness from macroeconomic estimates of a New-Keynesian Phillips Curve (NKPC) with the lower values obtained from surveys of firms’ pricing behaviour. This microeconomic evidence also suggests that the frequency with which firms adjust their prices varies across sectors. The paper shows that in the presence of this heterogeneity, estimates of aggregate price stickiness from microeconomic and macroeconomic data should differ. Heterogeneity in firms’ pricing decisions, as well as a more realistic production structure, is introduced into an otherwise standard New-Keynesian model. Using a model calibrated with microeconomic pricing survey data for Australia, the paper shows that estimates of the NKPC considerably overstate the true degree of price stickiness and may falsely suggest that some prices are indexed to past inflation. These problems arise because of a type of misspecification and a lack of suitable instruments.

Keywords: separate by New-Keynesian Phillips Curve; inflation (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Date: 2010-03
New Economics Papers: this item is included in nep-cba and nep-mac
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https://www.rba.gov.au/publications/rdp/2010/pdf/rdp2010-01.pdf (application/pdf)

Related works:
Journal Article: Reconciling microeconomic and macroeconomic estimates of price stickiness (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2010-01

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