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Price Rigidity: Microeconomic Evidence and Macroeconomic Implications

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Author Info

  • Emi Nakamura

    ()
    (Columbia Business School and Department of Economics, Columbia University, New York, NY 10027)

  • J�n Steinsson

    ()
    (Department of Economics, Columbia University, New York, NY 10027)

Abstract

We review recent evidence on price rigidity from the macroeconomics literature and discuss how this evidence is used to inform macroeconomic modeling. Sluggish price adjustment is a leading explanation for the large effects of demand shocks on output and, in particular, the effects of monetary policy on output. A recent influx of data on individual prices has greatly deepened macroeconomists’ understanding of individual price dynamics. However, the analysis of these new data raises a host of new empirical issues that have not traditionally been confronted by parsimonious macroeconomic models of price setting. Simple statistics such as the frequency of price change may be misleading guides to the flexibility of the aggregate price level in a setting in which temporary sales, product churning, cross-sectional heterogeneity, and large idiosyncratic price movements play an important role. We discuss empirical evidence on these and other important features of micro price adjustment and ask how they affect the sluggishness of aggregate price adjustment and the economy’s response to demand shocks.

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Bibliographic Info

Article provided by Annual Reviews in its journal Annual Review of Economics.

Volume (Year): 5 (2013)
Issue (Month): 1 (05)
Pages: 133-163

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Handle: RePEc:anr:reveco:v:5:y:2013:p:133-163

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Keywords: temporary sales; monetary non-neutrality;

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References

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Cited by:
  1. Kevin J. Fox & Iqbal A. Syed, 2014. "Price Discounts and the Measurement of Inflation," Discussion Papers 2014-05, School of Economics, The University of New South Wales.
  2. Emmanuel Saez & Pascal Michaillat, 2013. "A Theory of Aggregate Supply and Aggregate Demand as Functions of Market Tightness with Prices as Parameters," 2013 Meeting Papers 1216, Society for Economic Dynamics.

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