The Role of Sticky Prices in an Open Economy Dsge Model: A Bayesian Investigation

Abstract

In this paper we use a Dynamic Stochastic General Equilibrium (DSGE) model for an open economy to examine the role of sticky prices in explaining the joint behaviour of inflation and a fairly large set of macroeconomic variables. We find that price stickiness is an important feature for firms active in the domestic, export and import sectors, even though the model embodies variable capital utilisation, a working-capital channel and a time-varying inflation target. We also document that price stickiness in all sectors is important even if the markup shocks are allowed to be autocorrelated, although the implied average contract duration falls substantially under this assumption. (JEL: E40, E50, C11)