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Firm-Specific Production Factors in a DSGE Model with Taylor Price Setting

Grégory de Walque (), Frank Smets and Raf Wouters ()

MPRA Paper from University Library of Munich, Germany

Abstract: Using Bayesian likelihood methods, this paper estimates a dynamic stochastic general equilibrium model with Taylor contracts and firm-specific factors in the goods market on euro-area data. The paper shows how the introduction of firmspecific factors improves the empirical fit of the model and reduces the estimated contract length to a duration of four quarters, which is more consistent with the empirical evidence on average price durations in the euro area. However, in order to obtain this result, the estimated real rigidity is very large, either in the form of a very large constant elasticity of substitution between goods or in the form of an endogenous elasticity of substitution that is very sensitive to the relative price. Finally, the paper also investigates the implications of these estimates for the distribution of prices and quantities across the various goods sectors.

JEL-codes: G00 G0 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2006-06-30
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Published in International Journal of Central Banking Number 3.Volume(2006): pp. 107-154

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https://mpra.ub.uni-muenchen.de/810/1/MPRA_paper_810.pdf original version (application/pdf)

Related works:
Journal Article: Firm-Specific Production Factors in a DSGE Model with Taylor Price Setting (2006) Downloads
Working Paper: Firm-specific production factors in a DSGE model with Taylor price setting (2006) Downloads
Working Paper: Firm-specific production factors in a DSGE model with Taylor price setting (2006) Downloads
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