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Sticky Prices vs Limited Participation: What do we Learn from the Data?

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  • Peter Ireland
  • Niki Papadopoulou

Abstract

The method of maximum likelihood is used to estimate a Dynamic Stochastic General Equilibrium business cycle model that combines elements of existing sticky-price and limited-participation specifications. Sticky prices are incorporated, following Rotemberg (1982), by assuming that monopolistically competitive firms face a quadratic cost of nominal price adjustment. Limited participation is incorporated, following Cooley and Quadrini (1999), by assuming that households face a quadratic cost of portfolio adjustment.The results support the hypothesis that the degree of the portfolio adjustment is very small in the data, but significant. In addition, the data suggest that the response of the interest rate to deviations of output from the steady state in the interest rate rule should be very close to zero. This is argued by Christiano and Gust (1999) as well. Furthermore, as in Ireland (1999, 2000), the model can not reject the hypothesis of parameter stability for the policy parameters. On the other hand, the model rejects the hypothesis for the rest of the parameters.

Suggested Citation

  • Peter Ireland & Niki Papadopoulou, 2004. "Sticky Prices vs Limited Participation: What do we Learn from the Data?," Working Papers 2004_4, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2004_4
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    Cited by:

    1. Karamé, Frédéric & Patureau, Lise & Sopraseuth, Thepthida, 2008. "Limited participation and exchange rate dynamics: Does theory meet the data?," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1041-1087, April.
    2. Patureau, Lise, 2007. "Pricing-to-market, limited participation and exchange rate dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3281-3320, October.

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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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