Working Paper: NBER ID: w29112
Authors: Fernando E. Alvarez; Katarina Borovikov; Robert Shimer
Abstract: We develop an estimator and tests of a discrete time mixed proportional hazard (MPH) model of duration with unobserved heterogeneity. We allow for competing risks, observable characteristics, and censoring, and we use linear GMM, making estimation and inference straightforward. With repeated spell data, our estimator is consistent and robust to the unknown shape of the frailty distribution. We apply our estimator to the duration of price spells in weekly store data from IRI. We find substantial unobserved heterogeneity, accounting for a large fraction of the decrease in the Kaplan-Meier hazard with elapsed duration. Still, we show that the estimated baseline hazard rate is decreasing and a homogeneous firm model can accurately capture the response of the economy to a monetary policy shock even if there is significant strategic complementarity in pricing. Using competing risks and spell-specific observable characteristics, we separately estimate the model for regular and temporary price changes and find that the MPH structure describes regular price changes better than temporary ones.
Keywords: duration dependence; price changes; mixed proportional hazard model; sticky prices; monetary policy
JEL Codes: C14; C41; E31; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unobserved heterogeneity (C21) | decrease in Kaplan-Meier hazard (C41) |
| decrease in Kaplan-Meier hazard (C41) | decreasing baseline hazard rate b(t) (C41) |
| MPH structure (C69) | better description of regular price changes (E30) |
| average type (C46) | declines sharply in first 20 weeks of price spells (C41) |
| assumption of constant hazard rate (C41) | misrepresentation of impulse response of prices to monetary policy shocks (E39) |