Reassessing price adjustment costs in DSGE models

Sebastian Sienknecht

MPRA Paper from University Library of Munich, Germany

Abstract: Indexation theories have become standard for inflation persistence in DSGE models (Smets and Wouters (2003, 2007)). However, these theories overlook an important stylized fact of U.S. business cycles: high fluctuations in the first difference of inflation. I find that this pattern can be captured by adjustment costs precisely from the first difference of inflation (Pesaran (1991) labels this difference as a "speed change"). I estimate four DSGE models differing in their rigidity assumption and find that a framework with inflation-based adjustment costs has the highest probability to fit U.S. data.

Keywords: Phillips curve; Economic fluctuations; Estimation. (search for similar items in EconPapers)
JEL-codes: C51 E31 E32 (search for similar items in EconPapers)
Date: 2016-03-25
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:73763

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