Working Paper: CEPR ID: DP6227
Authors: Vitor Gaspar; Andrew Levin; Fernando Martins; Frank Smets
Abstract: Understanding the features and the determinants of individual price setting behaviour is important for the formulation of monetary policy. These behavioural mechanisms play a fundamental role in influencing the characteristics of aggregate inflation and in determining how monetary policy affects inflation and real economic activity. The Inflation Persistence Network, a collaborative research effort of the Eurosystem, analysed a large number of panel data sets of individual price records and conducted surveys of price-setting managers in many euro area countries. This paper discusses to what extent the extensive evidence coming from those two data sources provides support for some basic elements of the New Keynesian perspective. It analyses the implications of the micro evidence for distinguishing between competing theories of price stickiness and provides some brief reflections about the lessons for monetary policy.
Keywords: Monetary Policy; New Keynesian Models; Price Setting; Price Stickiness
JEL Codes: D4; E1; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price setting behavior (L11) | aggregate inflation (E31) |
| price setting behavior (L11) | real economy (E29) |
| infrequent price adjustment (L11) | short-run non-neutrality of monetary policy (E49) |
| market structure (imperfect competition) (L13) | pricing behavior (D40) |
| market competition (L13) | pricing strategies (D49) |