Smets and Wouters () find that at short- and medium-term horizons stochastic variations in the goods market mark-up are the most important source of inflation variability in the euro area. This article shows that an empirically plausible alternative interpretation is that the estimated price...

Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our...

This paper formulates and estimates a three-shock US business cycle model. The estimated model accounts for a substantial fraction of the cyclical variation in output and is consistent with the observed inertia in inflation. This is true even though firms in the model reoptimize prices on...

The growth rate of real GDP per capita is modelled and predicted at various time horizons for France, Germany, New Zealand, and the United Kingdom. The rate of growth is represented by a sum of two components - a monotonically decreasing trend and fluctuations related to the change in...

We present a model embodying moderate amounts of nominal rigidities which accounts for the observed inertia in inflation and persistence in output. The key features of our model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these...

In this paper we develop a multi-sector model of firms pricing behaviour under imperfect competition. We allow for the fact that some goods sold will be for final consumption, while others will be used as intermediate goods in further production. We assume that price setters are constrained by...

A persistent criticism of general equilibrium models of monetary policy which incorporate nominal inertia in the form of the New Keynesian Phillips Curve (NKPC) is that they fail to capture the extent of inflation inertia in the data. In this paper we derive a general equilibrium model based on...