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Firm-specific production factors in a DSGE model with Taylor price setting

Author

Listed:
  • Smets, Frank
  • Wouters, Raf
  • de Walque, Gregory
Abstract
This paper compares the Calvo model with a Taylor contracting model in the context of the Smets-Wouters (2003) Dynamic Stochastic General Equilibrium (DSGE) model. In the Taylor price setting model, we introduce firm-specific production factors and discuss how this assumption can help to reduce the estimated nominal price stickiness. Furthermore, we show that a Taylor contracting model with firm-specific capital and sticky wage and with a relatively short price contract length of four quarters is able to outperform, in terms of empirical fit, the standard Calvo model with homogeneous production factors and high nominal price stickiness. In order to obtain this result, we need very large real rigidities either in the form of a huge (constant) elasticity of substitution between goods or in the form of an elasticity of substitution that is endogenous and very sensitive to the relative price. JEL Classification: E1, E3

Suggested Citation

  • Smets, Frank & Wouters, Raf & de Walque, Gregory, 2006. "Firm-specific production factors in a DSGE model with Taylor price setting," Working Paper Series 648, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2006648
    Note: 58657
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    References listed on IDEAS

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    Cited by:

    1. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.
    2. Takuji Fueki & Ichiro Fukunaga & Hibiki Ichiue & Toyoichiro Shirota, 2016. "Measuring Potential Growth with an Estimated DSGE Model of Japan’s Economy," International Journal of Central Banking, International Journal of Central Banking, vol. 12(1), pages 1-32, March.
    3. Joao Madeira, 2012. "Evaluating the Role of Firm-Specific Capital in New Keynesian models," Discussion Papers 1204, University of Exeter, Department of Economics.
    4. Patrick Feve & Julien Matheron & Guillaume Sahuc, 2010. "Désinflation et chômage dans la zone euro : une analyse à l'aide d'un modèle var structurel," Annals of Economics and Statistics, GENES, issue 99-100, pages 365-394.
    5. Maarten Dossche & Freddy Heylen & Dirk Van den Poel, 2010. "The Kinked Demand Curve and Price Rigidity: Evidence from Scanner Data," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 723-752, December.
    6. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.
    7. Lukas Boer & Malte Rieth, 2024. "The Macroeconomic Consequences of Import Tariffs and Trade Policy Uncertainty," Discussion Papers of DIW Berlin 2072, DIW Berlin, German Institute for Economic Research.
    8. Huw Dixon & Hervé Le Bihan, 2012. "Generalised Taylor and Generalised Calvo Price and Wage Setting: Micro‐evidence with Macro Implications," Economic Journal, Royal Economic Society, vol. 122(560), pages 532-554, May.
    9. Patrick F»Ve & Julien Matheron & Jean-Guillaume Sahuc, 2010. "Disinflation Shocks in the Eurozone: A DSGE Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(2-3), pages 289-323, March.
    10. Madeira, João, 2015. "Firm-specific capital, inflation persistence and the sources of business cycles," European Economic Review, Elsevier, vol. 74(C), pages 229-243.
    11. Khan, Hashmat & Phaneuf, Louis & Victor, Jean Gardy, 2020. "Rules-based monetary policy and the threat of indeterminacy when trend inflation is low," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 317-333.
    12. Patrick Fève & Julien Matheron & Jean-Guillaume Sahuc, 2010. "Inflation Target Shocks and Monetary Policy Inertia in the Euro Area," Economic Journal, Royal Economic Society, vol. 120(547), pages 1100-1124, September.
    13. Pospelov Igor & Radionov Stanislav, 2015. "On the Social Efficiency in Monopolistic Competition Models," Higher School of Economics Economic Journal Экономический журнал Высшей школы экономики, CyberLeninka;Федеральное государственное автономное образовательное учреждение высшего образования «Национальный исследовательский университет «Высшая школа экономики», vol. 19(3), pages 386-394.
    14. Gregory de Walque & Frank Smets & Raf Wouters, 2006. "Price Shocks in General Equilibrium: Alternative Specifications," CESifo Economic Studies, CESifo Group, vol. 52(1), pages 153-176, March.
    15. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2010. "DSGE Models for Monetary Policy Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 7, pages 285-367, Elsevier.
    16. Audzei, Volha & Brůha, Jan, 2022. "A model of the Euro area, China, and the United States: Trade links and trade wars," Economic Modelling, Elsevier, vol. 111(C).
    17. V. I. Baluta & D. N. Shul’ts & P. A. Lavrinenko, 2022. "Assessing the Impact of Global Hydrocarbon Prices on the Russian Economy Based on the DSGE Model with Capital-Owning Firms," Studies on Russian Economic Development, Springer, vol. 33(1), pages 107-117, February.
    18. Andrei Polbin & Sergey Drobyshevsky, 2014. "Developing a Dynamic Stochastic Model of General Equilibrium for the Russian Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 166P, pages 156-156.
    19. Geert Langenus, 2006. "Fiscal sustainability indicators and policy design in the face of ageing," Working Paper Research 102, National Bank of Belgium.
    20. repec:dau:papers:123456789/12493 is not listed on IDEAS

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    More about this item

    Keywords

    DSGE models; inflation persistence;

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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