European Inflation Dynamics

Price-Setting Behaviour in Belgium: What Can Be Learned from an Ad Hoc Survey ?

“…A similar magnitude is found by Fabiani et al (2004). An elasticity of 4.5 implies a mark-up of 1.29, compared to 1.35 for the euro area in Bayoumi et al (2004) and 1.1 in Galí et al (2001). Only a limited number of firms report an elasticity of demand which is close to the situation of perfect competition (an infinite elasticity of demand), as the 95th percentile firm still reports an elasticity of demand below 10.…”

“…Jeanne (1998), Romer (2001), Eichenbaum and Fisher (2004) are examples of the New-Keynesian literature in which typically the interplay between both types of rigidity is emphasised, while Chari, Kehoe and Mc Grattan (2000) seriously challenge the ability of (empirically realistic) nominal rigidities, as such, to produce sufficient sluggishness at the aggregate level. Second, a question was inserted on the information set the newly decided prices are based on (questions B2a and B2b), as deviations from a fully optimising behaviour can be an additional source of sluggishness in the response of inflation to shocks, for instance as a result of rule of thumb price setters as in Galí et al (2001), as a result of indexation schemes as in Christiano, Eichenbaum and Evans (2001) or Smets and Wouters (2003), or as a result of stickiness in either the information gathering and/or the optimisation processes as in Mankiw and Reiss (2002). To our knowledge, this survey is the first in addressing the latter issue.…”

“…As already emphasised, a question was inserted as to the information set the price reviews are based on (questions B2a and B2b), since deviations from a fully optimising behaviour can be an additional source of sluggishness in the response of inflation to shocks, for instance as a result of rule of thumb price setters as in Galí et al (2001), as a result of indexation schemes as in Christiano, Eichenbaum and Evans (2001) or Smets and Wouters (2003), or as a result of stickiness in either the information gathering and/or the optimisation processes as in Mankiw and Reiss (2002).…”

Evaluating the German (New Keynesian) Phillips curve

“…A generalized version of the model proposed by Christiano, Eichenbaum and Evans (2005) is employed as our benchmark model specification that assumes a dynamic indexation scheme for those firms that do not re-optimize. Furthermore, we also consider a model with "rule-of-thumb" firms in the spirit of Galí and Gertler (1999) and Galí, Gertler and López-Salido (2001). We follow Galí et al (2001) and Sbordone (2002) and allow for some real rigidities derived from the assumption of firm-specific capital.…”

“…Furthermore, we also consider a model with "rule-of-thumb" firms in the spirit of Galí and Gertler (1999) and Galí, Gertler and López-Salido (2001). We follow Galí et al (2001) and Sbordone (2002) and allow for some real rigidities derived from the assumption of firm-specific capital.…”