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The Cross-Section Of Output And Inflation In A Dynamic Stochastic General Equilibrium Model With Sticky Prices

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Executive Summary

In a standard dynamic stochastic general equilibrium framework, with sticky prices, the cross sectional distribution of output and inflation across a population of firms is studied. The only form of heterogeneity is confined to the probability that the ith firm changes its prices in response to a shock. In this Calvo setup the moments of the cross sectional distribution of output and inflation depend crucially on the proportion of firms that are allowed to change their prices. The authors test this model empirically using German balance sheet data on a very large population of firms.

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