Faculty of Economics and Business Administration Publications Database

Sectoral price data and models of price setting

Maćkowiak, Bartosz
Volume: 56
Number: Supplement
Pages: S78 - S99
Month: October
ISSN-Print: 0304-3932
Link External Source: Online Version
Year: 2009
Keywords: Bayesian dynamic factor model; Calvo model; Menu cost; Sticky information; Rational inattention

In the median sector, 100 percent of the long-run response of the sectoral price index to a sector-specific shock occurs in the month of the shock. The standard Calvo model and the standard sticky-information model can match this finding only under extreme assumptions concerning the profit-maximizing price. The rational-inattention model of Maćkowiak and Wiederholt [2009a. Optimal sticky prices under rational inattention. American Economic Review 99, 769–803] can match this finding without an extreme assumption concerning the profit-maximizing price. Furthermore, there is little variation across sectors in the speed of response of sectoral price indexes to sector-specific shocks. The rational-inattention model matches this finding, while the Calvo model predicts too much cross-sectional variation.