Luis J. Álvarez

What Do Micro Price Data Tell Us on the Validity of the New Keynesian Phillips Curve

The New Keynesian Phillips curve (NKPC) is now the dominant model of inflation dynamics. In recent years, a large body of empirical research has documented price-setting behaviour at the individual level, allowing the assessment of the micro-foundations of pricing models. This paper analyses the implications of 25 theoretical models in terms of individual behaviour and finds that they considerably differ in their ability to match the key micro stylised facts. However, none is available to account for all of them, suggesting the need to develop more realistic micro-founded price setting models.

Competition and Price Adjustment in the Euro Area

This paper explores the role of a number of factors in explaining the heterogeneity in the degree of price stickiness across industries, on the basis of the information provided by surveys on pricing behavior conducted in nine euro area countries. The main focus is placed on the influence of competition on the degree of price flexibility. Our results suggest that the price setting strategies of the most competitive firms give them a greater capacity to react to shocks and make, in practice, for greater flexibility in their prices. The direct influence of market competition on price flexibility is corroborated by a cross-country cross-industry econometric analysis based on the information provided by surveys. This analysis also shows that the cost structure and demand conditions help to explain the degree of price flexibility. Finally, it suggests that countries in which product market regulation is more relevant are characterized by less price flexibility.

Housing Cycles in the Major Euro Area Countries

The recent burst of the house price bubble in the United States and its spillover effects on real economies worldwide has rekindled the interest in the role of housing in the business cycle. In this paper, we investigate the relationships between housing cycles among the four major euro area countries (Germany, France, Italy and Spain) over the sample 1980Q1-2008Q4. Our main findings are that GDP cycles show a high degree of comovement across these four countries, reflecting trade linkages, but much weaker ones for housing market cycles, where idiosyncratic factors play a major role. House prices are even less related than quantities across countries. We also find much stronger relationships in the common monetary policy period.

Does Housing Really Lead the Business Cycle

The aim of this paper is to characterize the cyclical properties of Spanish real and nominal housing related variables. Our three main results are: First, housing appears to lead the business cycle. Second, fluctuation in home prices are positively related to those of residential investment, suggesting the dominant role of demand factors over supply ones. Third,there are interesting asymmetries in cyclical fluctuations: contractions in GDP appear to be briefer than expansions.

Is a Calvo Price Setting Model Consistent with Individual Price Data

This paper shows that the standard Calvo model clearly fails to account for the distribution of price durations found in micro data. We propose a novel price setting model that fully captures heterogeneity in individual pricing behavior. Specifically, we assume that there is a continuum of firms that set prices according to a Calvo mechanism, each of them with a possibly different price adjustment parameter. The model is estimated by maximum likelihood and closely matches individual consumer and producer price data. Incorporating estimated price setting rules into a standard DSGE model shows that fully accounting for pricing heterogeneity is crucial to understanding inflation and output dynamics. The standard calibration that assumes within sector homogeneity, as in Carvalho (2006), is at odds with micro data evidence and leads to a substantial distortion of estimates of the real impact of monetary policy.

Micro-Based Estimates of Heterogeneous Pricing Rules: The United States vs. The Euro Area

This paper presents US and euro area estimates for a fully heterogeneous model, in which there is a continuum of firms setting prices with a constant probability of adjustment, which may differ from firm to firm. The estimated model accurately matches the empirical distribution function of individual price durations for the US and the euro area. Incorporating these micro-based pricing rules into a DSGE model, we find that nominal shocks have a greater real impact in the fully heterogeneous economy than in the standard Calvo model. We also find that nominal and real shocks bring about a reallocation of resources among sectors. Monetary policy is found to have a greater real impact in the euro area than in the United States.

Does Housing Really Lead the Business Cycle in Spain

The aim of this paper is to characterize the cyclical properties of Spanish real and nominal housing related variables. Our three main results are: first, housing appears to lead the business cycle. Second, fluctuations in home prices are positively related to those of residential investment, suggesting the dominant role of demand factors over supply ones. Third, there are interesting asymmetries in cyclical fluctuations: contractions in GDP appear to be briefer than expansions.

Is a Calvo price setting model consistent with micro price data

This paper shows that the standard Calvo model clearly fails to account for the distribution of price durations found in micro data. We propose a novel price setting model that fully captures heterogeneity in individual pricing behavior. Specifically, we assume that there is a continuum of firms that set prices according to a Calvo mechanism, each of them with a possibly different price adjustment parameter. The model is estimated by maximum likelihood and closely matches individual consumer and producer price data. Incorporating estimated price setting rules into a standard DSGE model shows that fully accounting for pricing heterogeneity is crucial to understanding inflation and output dynamics. The standard calibration that assumes within sector homogeneity, as in Carvalho (2006), is at odds with micro data evidence and leads to a substantial distortion of estimates of the real impact of monetary policy.

The Effect of Oil Price Fluctuations on Spanish Inflation

This article analyses the impact of changes in oil prices on the consumer price index (CPI) in the Spanish economy from a historical perspective. The evidence provided reveals a substantial degree of pass-through of these changes to CPI components tied to heating and vehicle fuel (direct effect). However, the estimated effect of changes in crude prices on firms’ input costs (indirect effects) and on inflation or wage expectations (second-round effects) is, on average, moderate. Consequently, in the current situation, in the absence of fresh shocks in the expected path of oil prices, the rise in the CPI in early 2017 – linked to base effects prompted by the low price of this commodity for most of 2016 – can be expected to be essentially temporary and, therefore, consistent with a downward trajectory in inflation in the coming months.

Business cycle estimation with high-pass and band-pass local polynomial regression

Filters constructed on the basis of standard local polynomial regression (LPR) methods have been used in the literature to estimate the business cycle. We provide a frequency domain interpretation of the contrast filter obtained by the difference between a series and its long-run LPR component and show that it operates as a kind of high-pass filter, meaning it provides a noisy estimate of the cycle. We alternatively propose band-pass local polynomial regression methods aimed at isolating the cyclical component. Results are compared to standard high-pass and band-pass filters. Procedures are illustrated using the US GDP series.