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Implications for Aggregate Inflation of Sectoral Asymmetries : Generalizing Woodford

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Listed:
  • Koskinen Hannu
  • Vilmunen Jouko

    (Faculty of Management, University of Tampere)

Abstract

This paper develops and simulates a simple two sector DSGE model for studying aggregate inflation and output dynamics under sectoral adjustment asymmetries. The CES aggregate consumption bundle consists of two different groups of goods with imperfect substitutability between as well as within the groups. Allowing for different within group CES aggregators implies that the degree of substitutability between goods in a group is group-specific. To generate sector-specific price rigidities the model assumes sector-specific Calvo pricing. The paper focuses on potential post-shock divergences across sectors as well as on the implications for aggregate inflation and output of the sectoral asymmetries and identifies an important role for the sectoral relative price for aggregate dynamics. More specifically, the paper generalizes Woodford (2003), which only allows for the price rigidity to differ across sectors. Incorporating sector-specific price elasticities is important and well in line with the micro-level evidence on individual as well as sectoral prices. From the point of view of allocational efficiency and welfare, relative price movements occupy a central role in models incorporating Calvo pricing. This particular feature underscores the perceived macroeconomic benefits of low and stable inflation. This paper takes this logic a step further by incorporating movements both in individual and sectoral relative prices.

Suggested Citation

  • Koskinen Hannu & Vilmunen Jouko, 2017. "Implications for Aggregate Inflation of Sectoral Asymmetries : Generalizing Woodford," Working Papers 1716, Tampere University, Faculty of Management and Business, Economics.
  • Handle: RePEc:tam:wpaper:1716
    as

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    File URL: http://urn.fi/URN:ISBN:978-952-03-0460-7
    File Function: First version, 2017
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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