Micro-based Estimates of Heterogeneous Pricing Rules: The United States vs. the Euro Area

• Published in: The Scandinavian journal of economics Vol. 112; no. 4; pp. 697 - 722
• Main Authors: Álvarez, Luis J., Burriel, Pablo
• Format: Journal Article
• Language: English
• Published: Oxford, UK Blackwell Publishing Ltd 01.12.2010; Blackwell Publishing; Wiley Blackwell
• Series: Scandinavian Journal of Economics
• Subjects: Analysis; C 40; Calvo model; Consumer Price Index; Consumer prices; D 40; DSGE; E 30; Economic and Monetary Union; Economic models; Euro Zone; Europe; Eurozone; Flexible prices; heterogeneity; Industrial prices; Industrial pricing; Modeling; Monetary policy; Price changes; Price formation; Price level; Price level changes; Price policy; Price setting; Price shocks; Pricing; Product management; Steady state economies; Sticky prices; Studies; U.S.A; United States > US; Eastern Europe; Western Europe
• ISSN: 0347-0520; 1467-9442; 1467-9442
• DOI: 10.1111/j.1467-9442.2010.01619.x

This paper presents US and euro area estimates for a fully heterogeneous model, in which there is a continuum of firms setting prices with a constant probability of adjustment, which may differ from firm to firm. The estimated model accurately matches the empirical distribution function of individual price durations for the US and the euro area. Incorporating these micro-based pricing rules into a DSGE model, we find that nominal shocks have a greater real impact in the fully heterogeneous economy than in the standard Calvo model. We also find that nominal and real shocks bring about a reallocation of resources among sectors. Monetary policy is found to have a greater real impact in the euro area than in the United States.