Evaluating the Fit of Sticky Price Models
Julien Matheron () and
Tristan-Pierre Maury ()
Working papers from Banque de France
We examine the effects of introducing investment adjustment costs, variable capital utilization, indivisible labor, and material goods into a sticky price model subject to a cash-in-advance constraint. Combining these elements, the model overcomes the main criticisms traditionally addressed to this class of models. Under Watson (1993) goodness-of-fit criterion, the model does a very good job at replicating the dynamics of output, hours and investment. However, this framework dramatically fails at reproducing the spectrum of inflation. This unfortunate conclusion is robust to numerous alternative specifications.
Keywords: Sticky prices; Spectral analysis (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Pages: 30 pages
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:104
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