Working Paper: CEPR ID: DP7339
Authors: Bartosz Adam Makowiak; Emanuel Moench; Mirko Wiederholt
Abstract: We estimate impulse responses of sectoral price indexes to aggregate shocks and to sector-specific shocks. 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 Ma´ckowiak and Wiederholt (2009a) 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.
Keywords: Bayesian Dynamic Factor Model; Calvo Model; Menu Cost; Rational Inattention; Sticky Information
JEL Codes: C11; D21; D83; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sector-specific shock (L89) | sectoral price index (C43) |
| aggregate shock (E10) | sectoral price index (C43) |