Can Staggered Price Setting Explain Short-Run Inflation Dynamics?

Esteban Jadresic
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Esteban Jadresic: International Monetary Fund

No 872, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: This paper presents a model of staggered price setting that allows for a flexible distribution of the durations of the prices underlying aggregate price behavior, and estimates it with US data. When tested against an unrestricted version of this model, standard models of sticky prices are rejected. In contrast, a stylized model that assumes a trimodal distribution of price durations with clusters on the first, fourth, and eighth quarter after prices are set, easily passes the same test. In addition, this model is able to replicate the dynamic behavior of inflation and output found in the data.

Date: 2000-08-01
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