Firm-Specific Production Factors in a DSGE Model with Taylor Price Setting

48 Pages Posted: 30 Jun 2006

See all articles by Gregory de Walque

Gregory de Walque

Facult├ęs Universitaires Notre-Dame de la Paix (FUNDP) - Faculty of Economics, Management and Social Sciences; National Bank of Belgium

Frank Smets

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

Rafael Wouters

National Bank of Belgium

Multiple version iconThere are 2 versions of this paper

Date Written: June 2006

Abstract

This paper compares the Calvo model with a Taylor contracting model in the context of the Smets-Wouters (2003) Dynamic Stochastic General Equilibrium (DSGE) model. In the Taylor price setting model, we introduce firm-specific production factors and discuss how this assumption can help to reduce the estimated nominal price stickiness. Furthermore, we show that a Taylor contracting model with firm-specific capital and sticky wage and with a relatively short price contract length of four quarters is able to outperform, in terms of empirical fit, the standard Calvo model with homogeneous production factors and high nominal price stickiness. In order to obtain this result, we need very large real rigidities either in the form of a huge (constant) elasticity of substitution between goods or in the form of an elasticity of substitution that is endogenous and very sensitive to the relative price.

Keywords: Inflation persistence, DSGE models

JEL Classification: E, E3

Suggested Citation

de Walque, Gregory and Smets, Frank and Wouters, Rafael, Firm-Specific Production Factors in a DSGE Model with Taylor Price Setting (June 2006). ECB Working Paper No. 648, Available at SSRN: https://ssrn.com/abstract=908619

Gregory De Walque (Contact Author)

Facult├ęs Universitaires Notre-Dame de la Paix (FUNDP) - Faculty of Economics, Management and Social Sciences ( email )

Rempart de la Vierge 8
B-5000 Namur
Belgium

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

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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