The reset inflation puzzle and the heterogeneity in price stickiness

Engin Kara

Research output: Contribution to journalArticle (Academic Journal)peer-review

5 Citations (Scopus)
245 Downloads (Pure)

Abstract

New Keynesian models have been criticised on the grounds that they
require implausibly large price shocks to explain inflation. Bils, Klenow, and
Malin (2012) show that, while these shocks are needed to reduce the excessive
inflation persistence generated by the models, they give rise to unrealistically
volatile reset price inflation. This paper shows that introducing heterogeneity
in price stickiness in the models overcomes these criticisms directed at them.
The incorporation of heterogeneity in price stickiness reduces the need for
large price shocks. With smaller price shocks, the new model comes close to
matching the data on reset inflation.
Original languageEnglish
Pages (from-to)29-37
Number of pages9
JournalJournal of Monetary Economics
Volume76
Early online date30 Aug 2015
DOIs
Publication statusPublished - Nov 2015

Keywords

  • DSGE models
  • Selection effect
  • Calvo
  • GTE

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