I am grateful to Chris Sims, Mark Gertler, Frank Smets, and Robert Lucas for comments on an earlier draft presented at the “Quantitative Evidence on Price Determination” conference. I am also grateful to two anonymous referees for very helpful comments. I would also like to thank Richard Windle and Sean Taylor for their assistance in research. Any views expressed in this paper remain solely those of the author's and do not necessarily reflect those of the Board of Governors of the Federal Reserve System or its staff.
Pricing Models: A Bayesian DSGE Approach for the U.S. Economy
Article first published online: 18 JAN 2007
Journal of Money, Credit and Banking
Volume 39, Issue Supplement s1, pages 127–154, February 2007
How to Cite
LAFORTE, J.-P. (2007), Pricing Models: A Bayesian DSGE Approach for the U.S. Economy. Journal of Money, Credit and Banking, 39: 127–154. doi: 10.1111/j.1538-4616.2007.00018.x
- Issue published online: 18 JAN 2007
- Article first published online: 18 JAN 2007
- Received October 31, 2005; and accepted in revised form September 19, 2006.
- Bayesian analysis;
- DSGE models;
- inflation persistence
This paper compares and estimates three pricing mechanisms in the context of a small DSGE model of the U.S. economy. We interpret our results as favoring the pricing mechanism presented in Wolman (1999 Wolman model) over the New Keynesian model with indexation (Gali and Gertler 1999, Smets and Wouters 2004a) and the sticky information model of Mankiw and Reis (2002). The key factor that explains the performance of the Wolman model is that the data reject the key assumption of the New Keynesian model that the firm's probability of price change is constant over time and independent of the contract's vintage. Our results also show that incorporating indexation in the New Keynesian model represents a poor expedient in matching the autocorrelation function of the inflation process over the last 20 years.