Separate Calvo price-stickiness parameters in an aggregate supply and demand model
Perkerson, Eric Leverett
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I test whether or not the degree of price-stickiness following supply and demand shocks differs. First, I use an aggregate supply and demand model to derive theoretical impulse response functions for both supply and demand shocks. Then, using various identification schemes, I identify supply and demand shocks in monthly time series data of industrial production and the consumer price index from January 1975 to January 2000, which I then use to derive empirical impulse response functions corresponding to the two shocks. I then estimate the Calvo price-stickiness parameter separately for supply and demand shocks by separately fitting the theoretical impulse response functions to the different empirical ones. I find that there is no significant improvement in the fit of the theoretical impulse response functions to the empirical impulse response functions by estimating the Calvo parameter separately for supply and demand shocks, and the evidence suggests that firms take approximately the same amount of time to adjust prices in response to demand shocks as they do to supply shocks.