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The Macroeconomic Controversy Over Price Rigidity — How to Resolve it and How Bayesian Estimation has Led us Astray

Author

Listed:
  • David Meenagh

    (Cardiff University)

  • Patrick Minford

    (Cardiff University
    CEPR)

  • Michael R. Wickens

    (Cardiff University
    CEPR
    University of York)

Abstract

Price rigidity plays a central role in macroeconomic models but remains controversial. Those espousing it look to Bayesian estimated models in support, while those assuming price flexibility largely impose it on their models. So controversy continues unresolved by testing on the data. In a Monte Carlo experiment we ask how different estimation methods could help to resolve this controversy. We find Bayesian estimation creates a large potential estimation bias compared with standard estimation techniques. Indirect estimation where the bias is found to be low appears to do best, and offers the best way forward for settling the price rigidity controversy.

Suggested Citation

  • David Meenagh & Patrick Minford & Michael R. Wickens, 2022. "The Macroeconomic Controversy Over Price Rigidity — How to Resolve it and How Bayesian Estimation has Led us Astray," Open Economies Review, Springer, vol. 33(4), pages 617-630, September.
    • Handle: RePEc:kap:openec:v:33:y:2022:i:4:d:10.1007_s11079-021-09658-y
    DOI: 10.1007/s11079-021-09658-y
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    References listed on IDEAS

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    2. Hatcher, Michael & Minford, Patrick, 2023. "Chameleon models in economics: A note," Cardiff Economics Working Papers E2023/10, Cardiff University, Cardiff Business School, Economics Section.

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    More about this item

    Keywords

    Bayesian; Maximum likelihood; Indirect inference; Estimation bias;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory

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