Price Shocks in General Equilibrium: Alternative Specifications

Posted: 2 Jul 2008

See all articles by Gregory de Walque

Gregory de Walque

affiliation not provided to SSRN

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Rafael Wouters

National Bank of Belgium

Abstract

Smets and Wouters () find that at short- and medium-term horizons stochastic variations in the goods market mark-up are the most important source of inflation variability in the euro area. This article shows that an empirically plausible alternative interpretation is that the estimated price mark-up shocks represent relative price (e.g. productivity) shocks in a flexible-price sector. Such an interpretation is consistent with recent micro findings that prices are very flexible in some sectors such as the food and energy sector, while they are very sticky in other sectors such as services.

Keywords: sticky prices, DSGE models, business cycle fluctuations

JEL Classification: E1, E2, E3

Suggested Citation

Walque, Gregory de and Smets, Frank and Wouters, Rafael, Price Shocks in General Equilibrium: Alternative Specifications. CESifo Economic Studies, Vol. 52, Issue 1, pp. 153-176, 2006, Available at SSRN: https://ssrn.com/abstract=1154441 or http://dx.doi.org/10.1093/cesifo/ifj005

Gregory de Walque (Contact Author)

affiliation not provided to SSRN

Frank Smets

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Rafael Wouters

National Bank of Belgium ( email )

Brussels, B-1000
Belgium
+32 2 221 5441 (Phone)
+32 2 221 3162 (Fax)

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