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CESifo Economic Studies Advance Access originally published online on February 23, 2006
CESifo Economic Studies 2006 52(1):153-176; doi:10.1093/cesifo/ifj005
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© The Author 2006. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Price Shocks in General Equilibrium: Alternative Specifications

Gregory de Walque, Frank Smets and Raf Wouters*

Smets and Wouters (2003) find that at short- and medium-term horizons stochastic variations in the goods market mark-up are the most important source of inflation variability in the euro area. This article shows that an empirically plausible alternative interpretation is that the estimated price mark-up shocks represent relative price (e.g. productivity) shocks in a flexible-price sector. Such an interpretation is consistent with recent micro findings that prices are very flexible in some sectors such as the food and energy sector, while they are very sticky in other sectors such as services. (JEL codes: E1, E2, E3)

Key Words: sticky prices • DSGE models • business cycle fluctuations


* Gregory de Walque: National Bank of Belgium, e-mail: Gregory.Dewalque{at}nbb.be, Frank Smets: European Central Bank, CEPR and Ghent University, e-mail: Frank.Smets{at}ecb.int and Raf Wouters: National Bank of Belgium e-mail: Rafael.Wouters{at}nbb.be

The views expressed in this article are our own and do not necessarily reflect those of the National Bank of Belgium or the European Central Bank.


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