DP7339 Sectoral Price Data and Models of Price Setting

Author(s): Bartosz Adam Mackowiak , Emanuel Moench , Mirko Wiederholt

Publication Date: June 2009

Keyword(s): Bayesian dynamic factor model , Calvo model , menu cost , rational inattention , sticky information

JEL(s): C11 , D21 , D83 , E31

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP7339.asp.asp

We estimate impulse responses of sectoral price indexes to aggregate shocks and to sector-specific shocks. In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock. The standard Calvo model and the standard sticky-information model can match this finding only under extreme assumptions concerning the profit-maximizing price. The rational-inattention model of Ma´ckowiak and Wiederholt (2009a) can match this finding without an extreme assumption concerning the profit-maximizing price. Furthermore, there is little variation across sectors in the speed of response of sectoral price indexes to sector-specific shocks. The rational-inattention model matches this finding, while the Calvo model predicts too much cross-sectional variation.