The Macroeconomic Controversy Over Price Rigidity — How to Resolve it and How Bayesian Estimation has Led us Astray

Price rigidity plays a central role in macroeconomic models but remains controversial. Those espousing it look to Bayesian estimated models in support, while those assuming price flexibility largely impose it on their models. So controversy continues unresolved by testing on the data. In a Monte Car...

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Bibliographic Details
Published inOpen economies review Vol. 33; no. 4; pp. 617 - 630
Main Authors Meenagh, David, Minford, Patrick, Wickens, Michael R.
Format Journal Article
LanguageEnglish
Published New York Springer US 01.09.2022
Springer Nature B.V
Subjects
Bayesian analysis
Development Economics
Disputes
Economic models
Economic Policy
Economics
Economics and Finance
Estimation bias
European Integration
Flexibility
International Economics
Macroeconomics
Macroeconomics/Monetary Economics//Financial Economics
Monte Carlo simulation
Research Article
Indirect inference
Estimation bias
C11
Maximum likelihood
Bayesian
E12
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Summary:Price rigidity plays a central role in macroeconomic models but remains controversial. Those espousing it look to Bayesian estimated models in support, while those assuming price flexibility largely impose it on their models. So controversy continues unresolved by testing on the data. In a Monte Carlo experiment we ask how different estimation methods could help to resolve this controversy. We find Bayesian estimation creates a large potential estimation bias compared with standard estimation techniques. Indirect estimation where the bias is found to be low appears to do best, and offers the best way forward for settling the price rigidity controversy.
ISSN:0923-7992
1573-708X
DOI:10.1007/s11079-021-09658-y