Heterogeneous Price-Setting Behavior and Aggregate Dynamics: Some General Results
43 Pages Posted: 29 Nov 2012
Date Written: March 1, 2008
We analyze the effects of heterogeneity in price setting behavior in time-dependent sticky price and sticky information models characterized by quite general adjustment hazard functions. In a large class of models that includes the most commonly used price setting specifications, heterogeneity leads monetary shocks to have larger real effects than in one-sector economies with the same frequency of adjustments. Quantitatively, the effects of heterogeneity in models calibrated to match the recent empirical evidence on pricing behavior are large, even in the absence of strategic complementarity in price setting. We find that the degree of monetary non-neutrality in the calibrated heterogeneous economies can be as large as in an otherwise identical one-sector economy with roughly three times more nominal rigidity.
Keywords: heterogeneity, aggregation, price setting, general hazard function
JEL Classification: E1, E3
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