Article ID Journal Published Year Pages File Type
967950 Journal of Monetary Economics 2007 16 Pages PDF
Abstract

This paper assesses the empirical performance Calvo style models of price re-optimization. We first show that versions of these models in which firms update non-re-optimized prices to lagged inflation account well for the statistical behavior of post-war U.S. inflation rates. We then investigate whether these models imply plausible degrees of inertia in price setting behavior by firms. They do, but only if we depart from two standard auxiliary assumptions: monopolistically competitive firms face a constant elasticity of demand, and capital is homogeneous and can be instantaneously reallocated after a shock. We develop a version of the model in which these assumptions are relaxed and show that it is consistent with the view that firms re-optimize prices, on average, once every two quarters.

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