Use Of Gmm And Estimate Parameters For Each Sector

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BCR use GMM to estimate parameters for each sector in the model. Price rigidities are only significantly different from zero for nondurable goods and services, however the p-value of a Wald test rejects a null hypothesis of homogenous price rigidities across sectors. This result suggests that price rigidity in the service sector alone drives previous estimates of price rigidities based on macroeconomic data. This result is supported by Bils and Klenow (2004) and Baudry et al. (2004) using final good prices in the CPI basket to report heterogeneous price stickiness and longer duration between adjustments for services. Expected durations between price adjustments following Calvo (1983) pricing are nine quarters for services, and as low as…show more content…
- this could explain the variation of price rigidities between macro and micro based studies. BCR analyse impulse response functions to a temporary 1% rise in the growth rate of money supply, after which the level returns to its steady state. This monetary shock has many aggregate dynamics generating a rise in aggregate demand, increasing aggregate output. However the sectoral heterogeneity modelled by BCR produced variations in effects across sectors. Output increases in services and construction are larger than those for durable and nondurable goods. The mechanisms for these results are found to be different by BCR, with monopolistically completive services and durable goods sectors increasing output to meet rising demand. Conversely, increases in construction and nondurable goods output occurs in spite of flexible sector prices, reflecting the demand of other sectors for investment goods following the initial increase in aggregate demand. As investment goods production takes place majoritively in these sectors, the increase in output of both sectors is large. Services is the most labour intensive sector analysed, explaining why it displays the largest increase in real wages, as firms demand more labour from households. The reallocative effect of monetary policy shocks on labour mobility has been noted by Davis and Haltiwanger (2001), with BCR’s results mirroring to some level labour mobility across sectors as seen in US data. A large change in relative prices is also
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