Working Paper Series no. 257: A unified framework for understanding and comparing dynamic wage and price-setting models.

Abstract

This paper argues that the cross-sectional approach to durations is essential to understand nominal rigidity because this captures the fact that price-spells are generated by firms' price-setting behavior. Since the distribution of durations is dominated by a proliferation of short contracts, the cross-sectional measure corrects for this by length-biased sampling. Modelling the price-spell durations in this way enables us to see how Taylor, Calvo and their generalizations relate to each other, and enable us to compare price-setting behavior for a given distribution of durations. We also show how the micro-data can be directly related to the macroeconomic pricing models in this setting.

Huw D. Dixon
November 2009

Classification JEL : E50

Keywords : Price-spell, steady state, hazard rate, Calvo, Taylor.