Calvo price probability for developed country and developing coutnry

General DSGE Modeling
1

Dear Johannes and other scholars,
First thank you very much for your previous guidance, I am grateful.
I am currently specifying a two-country DSGE model involving one developed country and one developing country. I need to specify Calvo pricing mechanism for both coutnries, I define alpha as the probability that firms do Not adjust price in each period, and (1-alpha) as the probability that firms reoptimize prices in each period. I have two questions:

  1. Intuitively, does developed country have more price stickiness (high value of alpha) than that of developing coutnry? Or does developing country have more price stickiness (high value of alpha) than that of developed country?
  2. Assuming information asymmetry between bank lenders and firm borrowers in credit markets, and there exists financial acceleration effects induced by information asymmetry. Does more price stickiness (higher value of alpha) or less price stickiness (lower value of alpha) induce larger financial acceleration effects?
    Thank you very much and look forward to hearing from you.
    Jesse
    PhD Candidate
2
  1. I don’t know whether there is a general accepted answer to that question. My guess is that you would need to look at the country at hand.
  2. Again, I would presume there is no general answer. Rather, I would expect some type of U-shape. Very strong price rigidities typycally lead to very persistent IRFs but with peak effects dampened. At the same time, there may be complementarities with other rigidities that may alter the picture.