Microeconometric evidence on demand-side real rigidity and implications for monetary non-neutrality
- To model the observed slow response of aggregate real variables to nominal shocks, most macroeconomic models incorporate real rigidities in addition to nominal rigidities. One popular way of modelling such a real rigidity is to assume a non-constant demand elasticity. By using a homescan data set for three European countries, including prices and quantities bought for a large number of goods, in addition to consumer characteristics, we provide estimates of price elasticities of demand and on the degree of demand-side real rigidities. We find that price elasticites of demand are about 4 in the median. Furthermore, we find evidence for demand-side real rigidities. These are, however, much smaller than what is often assumed in macroeconomic models. The median estimate for demand-side real rigidity, the super-elasticity, is in a range between 1 and 2. To quantitatively assess the implications of our empirical estimates, we calibrate a menu-cost model with the estimated super-elasticity. We find that the degree of monetary non-neutrality doubles in the model including demand-side real rigidity, compared to the model with only nominal rigidity, suggesting a multiplier effect of around two. However, the model can explain only up to 6% of the monetary non-neutrality observed in the data, implying that additional multipliers are necessary to match the behavior of aggregate variables.
Author: | Günter W. Beck, Sarah M. Lein |
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URN: | urn:nbn:de:hebis:30:3-415390 |
URL: | https://www.ifk-cfs.de/fileadmin/downloads/publications/wp/2016/CFS_WP_534.pdf |
Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 534 |
Series (Serial Number): | CFS working paper series (534) |
Publisher: | Center for Financial Studies |
Place of publication: | Frankfurt, M. |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2016 |
Year of first Publication: | 2016 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2016/10/18 |
Tag: | demand curve; monetary non-neutrality; price elasticity; price-setting; super-elasticity |
Edition: | 7 July, 2016 |
Page Number: | 45 |
HeBIS-PPN: | 390270784 |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
JEL-Classification: | C Mathematical and Quantitative Methods / C3 Multiple or Simultaneous Equation Models |
Sammlungen: | Universitätspublikationen |
Licence (German): | Deutsches Urheberrecht |