Estimating the frequency of price re-optimization in Calvo-style models

Martin Eichenbaum*, Jonas D.M. Fisher

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

64 Scopus citations

Abstract

This paper assesses the empirical performance Calvo style models of price re-optimization. We first show that versions of these models in which firms update non-re-optimized prices to lagged inflation account well for the statistical behavior of post-war U.S. inflation rates. We then investigate whether these models imply plausible degrees of inertia in price setting behavior by firms. They do, but only if we depart from two standard auxiliary assumptions: monopolistically competitive firms face a constant elasticity of demand, and capital is homogeneous and can be instantaneously reallocated after a shock. We develop a version of the model in which these assumptions are relaxed and show that it is consistent with the view that firms re-optimize prices, on average, once every two quarters.

Original languageEnglish (US)
Pages (from-to)2032-2047
Number of pages16
JournalJournal of Monetary Economics
Volume54
Issue number7
DOIs
StatePublished - Oct 2007

Keywords

  • Monetary transmission mechanism
  • Nominal rigidities

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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