Using Micro Data on Prices to Improve Business Cycle Models

I embed the pricing model proposed by Dixon and Kara (2011a, b) (i.e. a Generalized Taylor Economy (GTE)) into a state of the art instance of New Keynesian economics (e.g. Christiano, Eichenbaum and Evans (2005) and Smets and Wouters (2007)). The GTE is built to account for one of the most important features of the data: hetero- geneity in price spells. I estimate the resulting model for the US using Bayesian methods. The new model matches key features of micro and macro data that would otherwise have been elusive.