Nominal Price Rigidities in a Multisector Model

This paper uses a multisector sticky price model with cash-in-advance constraint to examine the implications of sectoral nominal price rigidities for the cyclical behavior of sectoral and aggregate movements in prices and output. The data suggest that correlations between sectoral output and price changes are substantially lower than would be implied by a flexible price model with sectoral technology shocks. Some degree of price stickiness (but not too much) can help reconcile the price-output relationship implied by a multisector general equilibrium model to that seen in the data. Also, the sticky-price model produces aggregate inflation persistence comparable to that observed in the data. JEL Classification: E3 Department of Economics, Southern Methodist University, Dallas TX 75275-0496 and Research Department, Federal Reserve Bank of Dallas, Dallas TX 75201, USA. E-mail: [email protected]; Phone: 214-768-2693; Fax: 214-768-1821. Department of Economics and International Business, Sam Houston State University, Huntsville, TX 77341-2118, USA. E-mail: [email protected]; Phone: 936-294-4760; Fax: 936-294-3488 * The views expressed in this paper do not reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.