Sticky-price models and the natural rate hypothesis

Javier Andrés (), David Lopez-Salido and Edward Nelson

No 2005-018, Working Papers from Federal Reserve Bank of St. Louis

Abstract: A major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state. In this paper we estimate a dynamic optimizing business cycle model whose price-setting behavior satisfies the natural rate hypothesis. The price-adjustment specifications we consider are the sticky-information specification of Mankiw and Reis (2002) and the indexed contracts of Christiano, Eichenbaum, and Evans (2005). Our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen. Consequently, the alternative model specifications deliver similar estimates of the U.S. output gap series, but the empirical behavior of the gap series differs substantially from standard gap estimates.

Keywords: Monetary policy; Prices (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (65)

Published in Journal of Monetary Economics, July 2005, 52(5), pp. 1025-53

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Journal Article: Sticky-price models and the natural rate hypothesis (2005)
Working Paper: Sticky-Price Models and the Natural Rate Hypothesis (2005)
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