Business Intelligence

Strategic Interaction Among Heterogeneous Price-setters In An Estimated DSGE Model

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Executive Summary

The authors consider a DSGE model in which firms follow one of four price-setting regimes: sticky prices, sticky-information, rule-of-thumb, or full-information flexible prices. The parameters of the model, including the fractions of each type of firm, are estimated by matching the moments of the observed variables of the model to those found in the data. They find that sticky-price firms and sticky-information firms jointly account for over 80% of firms in the model, with the rest largely accounted for by rule-of-thumb firms. They compare the performance of the hybrid model to pure sticky-price and sticky-information models along various dimensions, including monetary policy implications.

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