A New Keynesian Model with Heterogeneous Price Setting

Research output: Working paper


The Calvo contract pricing mechanism has become the most widely acceptedmicrofoundation to the NK Phillips curve but unfortunately predictsthat all firms in the economy face the same probability of price change. Tobetter explain the stylized fact this paper relaxes the homogeneous firm assumptionin the Calvo contract, to provide a macroeconomic explanation moreconsistent with recently available microeconomic evidence that suggests firmsface differing probabilities of price change. A simple New Keynesian dynamicstochastic general equilibrium (DSGE) model with nominal rigiditiesand habit in consumption for the US is estimated using Bayesian techniquesand finds evidence of a flexible price sector of around 6% and a sticky pricesector of between 55% and 70% depending on model specification.

Bibliographical metadata

Original languageEnglish
Place of PublicationUniversity of Manchester
Number of pages48
Publication statusPublished - 22 Oct 2010

Publication series

NameCentre for Growth and Business Cycle Research Discussion Paper Series