Modelling the Heterogeneous Price Setting Behavior of Firms (DSGE Approach)
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Abstract:
Despite the empirical evidence of the difference in the degree of price stickiness of goods and services, in the new standard Keynesian models, the same price stickiness is considered for all firms producing intermediate goods. In recent years, a new generation of pricing models has been introduced to simulate the heterogeneous price setting behavior in which, unlike standard pricing models, there are differences between firms in terms of degree of price stickiness as well as the type of nominal rigidity. It is important to examine the existence of heterogeneity in the pricing behavior of firms in order to analyze the effects of monetary policy accurately. In this study, the effects of monetary policy on key macroeconomic variables have been investigated, considering the differences in the degree of price stickiness and heterogeneous price setting behavior. Based on the results, the multi-sectoral model, which is a combination of four pricing models (including Calvo model, Calvo model with partial indexation (hybrid), sticky information and fully flexible prices) is more consistent with the stylized facts of the Iranian economy. The multi-sectoral model could match simultaneously the moments of the inflation rate and output gap. Also, this model has been able to explain the persistence of inflation endogenously. In addition, the multi-sectoral model could simulate the inflation inertia in reaction to a monetary shock.
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Journal title
volume 14 issue 50
pages 747- 782
publication date 2022-03
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