IDEAS home Printed from https://ideas.repec.org/p/ter/wpaper/0103.html
   My bibliography  Save this paper

Price and wage inflation inertia under time-dependent adjustments

Author

Listed:
  • Di Bartolomeo Giovanni
  • Di Pietro Marco

Abstract

We derive and estimate a small-scale DSGE model augmented with price and wage adjustment governed by a time-dependent mechanisms. Byusing positively sloping hazard functions, we micro-found price and wage inflation intrinsic persistence, as we derive price and wage Phillips curves characterized by both forward and backward terms for inflation. Our estimation confirms upward-sloping hazard functions. Finally, we compare the empirical performance of our model to several popular alternatives based on di¤erent price and wage adjustment mechanisms, including Calvo pricing. By comparing log-marginal likelihoods of di¤erent estimations, we find that our model clearly outperforms these alternatives.

Suggested Citation

  • Di Bartolomeo Giovanni & Di Pietro Marco, 2013. "Price and wage inflation inertia under time-dependent adjustments," wp.comunite 0103, Department of Communication, University of Teramo.
    • Handle: RePEc:ter:wpaper:0103
    as

    Download full text from publisher

    File URL: https://www.dipecodir.it/wpcom/data/wp_no_103_2013.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 655-690.
    2. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    4. Jordi Galí & Frank Smets & Rafael Wouters, 2012. "Unemployment in an Estimated New Keynesian Model," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 329-360.
    5. Marvin Goodfriend & Robert G. King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296, National Bureau of Economic Research, Inc.
    6. Canova, Fabio & Sala, Luca, 2009. "Back to square one: Identification issues in DSGE models," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 431-449, May.
    7. Richard Mash, 2004. "Optimising Microfoundations for Inflation Persistence," Economics Series Working Papers 183, University of Oxford, Department of Economics.
    8. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    9. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
    10. John Geweke, 1999. "Using simulation methods for bayesian econometric models: inference, development,and communication," Econometric Reviews, Taylor & Francis Journals, vol. 18(1), pages 1-73.
    11. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    12. Marianna Riggi, 2010. "Nominal And Real Wage Rigidities In New Keynesian Models: A Critical Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 24(3), pages 539-572, July.
    13. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    15. Riggi, Marianna & Tancioni, Massimiliano, 2010. "Nominal vs real wage rigidities in New Keynesian models with hiring costs: A Bayesian evaluation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(7), pages 1305-1324, July.
    16. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    17. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
    18. John Geweke, 1999. "Using Simulation Methods for Bayesian Econometric Models," Computing in Economics and Finance 1999 832, Society for Computational Economics.
    19. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    20. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Giovanni Di Bartolomeo & Marco Di Pietro, 2017. "Intrinsic Persistence of Wage Inflation in New Keynesian Models of the Business Cycles," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(6), pages 1161-1195, September.
    2. Del Negro, Marco & Schorfheide, Frank, 2008. "Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1191-1208, October.
    3. Richard Dennis, 2006. "The frequency of price adjustment and New Keynesian business cycle dynamics," Working Paper Series 2006-22, Federal Reserve Bank of San Francisco.
    4. Eijffinger, Sylvester & Grajales Olarte, Anderson & Uras, Burak, 2020. "Heterogeneity in wage setting behavior in a New-Keynesian Model," Other publications TiSEM 24069cb1-ed64-4367-9a37-b, Tilburg University, School of Economics and Management.
    5. Marco Del Negro & Frank Schorfheide, 2009. "Monetary Policy Analysis with Potentially Misspecified Models," American Economic Review, American Economic Association, vol. 99(4), pages 1415-1450, September.
    6. Taylor, J.B., 2016. "The Staying Power of Staggered Wage and Price Setting Models in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2009-2042, Elsevier.
    7. Marco Di Pietro & Enrico Saltari, 2018. "Economic Fluctuations in the U.S. and Euro Area: Quantifying the Contribution of Technical Change," Southern Economic Journal, John Wiley & Sons, vol. 85(1), pages 203-216, July.
    8. Andrew T. Levin & Alexei Onatski & John Williams & Noah M. Williams, 2006. "Monetary Policy under Uncertainty in Micro-Founded Macroeconometric Models," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 229-312, National Bureau of Economic Research, Inc.
    9. Di Bartolomeo, Giovanni & Tirelli, Patrizio & Acocella, Nicola, 2012. "Inflation targets and endogenous wage markups in a New Keynesian model," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 391-403.
    10. Coenen, Gunter & Levin, Andrew T. & Christoffel, Kai, 2007. "Identifying the influences of nominal and real rigidities in aggregate price-setting behavior," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2439-2466, November.
    11. Adnan Haider Bukhari & Safdar Ullah Khan, 2008. "A Small Open Economy DSGE Model for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(4), pages 963-1008.
    12. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
    13. Lindé, Jesper & Smets, Frank & Wouters, Rafael, 2016. "Challenges for Central Banks´ Macro Models," Working Paper Series 323, Sveriges Riksbank (Central Bank of Sweden).
    14. Jordi Galí & Mark Gertler, 2007. "Macroeconomic Modeling for Monetary Policy Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 25-46, Fall.
    15. Bhattarai, Saroj & Eggertsson, Gauti B. & Schoenle, Raphael, 2018. "Is increased price flexibility stabilizing? Redux," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 66-82.
    16. Hürtgen, Patrick, 2014. "Consumer misperceptions, uncertain fundamentals, and the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 279-292.
    17. Carrillo, Julio A., 2012. "How well does sticky information explain the dynamics of inflation, output, and real wages?," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 830-850.
    18. Elton Beqiraj & Giovanni Di Bartolomeo & Marco Di Pietro & Carolina Serpieri, 2020. "Bounded rationality and heterogeneous expectations: Euler versus anticipated-utility approach," Journal of Economics, Springer, vol. 130(3), pages 249-273, August.
    19. Philip Arestis & Georgios Chortareas & John D. Tsoukalas, 2010. "Money and Information in a New Neoclassical Synthesis Framework," Economic Journal, Royal Economic Society, vol. 120(542), pages 101-128, February.
    20. Kim, Insu, 2009. "Dual Wage Rigidities: Theory and Some Evidence," MPRA Paper 21494, University Library of Munich, Germany, revised Mar 2010.

    More about this item

    Keywords

    time-dependent price/wage adjustments; Calvo pricing; intrinsic inflation inertia; hybrid Phiilips curves; model comparison;
    All these keywords.

    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ter:wpaper:0103. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Giovanni Di Bartolomeo (email available below). General contact details of provider: http://sites.google.com/a/uniroma1.it/cimeo/home .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.