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Evaluating the Fit of Sticky Price Models

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  • Matheron,J.
  • Maury, P-M.

Abstract

We examine the effects of introducing investment adjustment costs, variable capital utilization, indivisible labor, and material goods into a sticky price model subject to a cash-in-advance constraint. Combining these elements, the model overcomes the main criticisms traditionally addressed to this class of models. Under Watson (1993) goodness-of-fit criterion, the model does a very good job at replicating the dynamics of output, hours and investment. However, this framework dramatically fails at reproducing the spectrum of inflation. This unfortunate conclusion is robust to numerous alternative specifications.

Suggested Citation

  • Matheron,J. & Maury, P-M., 2004. "Evaluating the Fit of Sticky Price Models," Working papers 104, Banque de France.
    • Handle: RePEc:bfr:banfra:104
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    References listed on IDEAS

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    More about this item

    Keywords

    Sticky prices ; Spectral analysis;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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