Article ID Journal Published Year Pages File Type
5057943 Economics Letters 2016 5 Pages PDF
Abstract

•In money macro, Rotemberg and Calvo pricing are two popular forms of sticky prices.•Rotemberg pricing has grown in popularity due to its computational advantage.•Rotemberg pricing better fits U.S. data due to differences at the zero lower bound.•Our results indicate the recent shift to Rotemberg pricing is justified by the data.

Structural models used to study monetary policy often include sticky prices. Calvo pricing is more common but Rotemberg pricing has become popular due to its computational advantage. To determine whether the data supports that change, we estimate a nonlinear New Keynesian model with a zero lower bound (ZLB) constraint and each type of sticky prices. The models produce similar parameter estimates and the filtered shocks are nearly identical when the Fed was not constrained, but the Rotemberg model has a higher marginal data density and it endogenously generates more volatility at the ZLB, which helps explain data from 2008-2011.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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