Sticky prices or rational inattention – What can we learn from sectoral price data?

Daniel Kaufmann & Sarah Lein

Résumé This paper derives stylised facts on sectoral inflation dynamics and confronts these facts with two popular theoretical models of price setting. Based on sectoral price responses to macroeconomic shocks estimated from an approximate factor model, we find that the frequency of price changes explains a relevant share of the cross-sectional variation of the speed and size of responses. Moreover, there is little evidence that the volatility of sectoral inflation due to idiosyncratic shocks dampens the size and speed of the responses to macroeconomic shocks. These findings support a multi-sector model with sticky prices rather than a rational-inattention model. We derive the results from different modelling and sampling decisions proposed in the literature, and we find that the explanatory power of the frequency of price changes for the speed of response to a macroeconomic shock proves robust in the face of these decisions. Other results are sensitive with respect to the choice of the factor model and the treatment of outliers.
Mots-clés Heterogeneity in price setting, sectoral price data, multi-sector sticky-price
model, rational inattention, approximate factor model
Citation Kaufmann, D., & Lein, S. (2013). Sticky prices or rational inattention – What can we learn from sectoral price data?. European Economic Review, 64, 385-394.
Type Article de périodique (Anglais)
Date de publication 1-11-2013
Nom du périodique European Economic Review
Volume 64
Pages 385-394
URL https://www.sciencedirect.com/science/article/pii/S001429...