EconPapers    
Economics at your fingertips  
 

Is a Calvo price setting model consistent with micro price data?

Luis Alvarez and Pablo Burriel ()

No 1010, Working Papers from Banco de España, Working Papers Homepage

Abstract: This paper shows that the standard Calvo model clearly fails to account for the distribution of price durations found in micro data. We propose a novel price setting model that fully captures heterogeneity in individual pricing behavior. Specifically, we assume that there is a continuum of firms that set prices according to a Calvo mechanism, each of them with a possibly different price adjustment parameter. The model is estimated by maximum likelihood and closely matches individual consumer and producer price data. Incorporating estimated price setting rules into a standard DSGE model shows that fully accounting for pricing heterogeneity is crucial to understanding inflation and output dynamics. The standard calibration that assumes within sector homogeneity, as in Carvalho (2006), is at odds with micro data evidence and leads to a substantial distortion of estimates of the real impact of monetary policy.

Keywords: price setting; Calvo model; heterogeneity; hazard rate (search for similar items in EconPapers)
JEL-codes: C40 D40 E30 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2010-04
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/10/Fic/dt1010e.pdf First version, April 2010 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1010

Access Statistics for this paper

More papers in Working Papers from Banco de España, Working Papers Homepage Contact information at EDIRC.
Bibliographic data for series maintained by María Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de España ().

 
Page updated 2021-01-12
Handle: RePEc:bde:wpaper:1010