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How Frequent Are Small Price Changes?

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  • Martin S. Eichenbaum
  • Nir Jaimovich
  • Sergio Rebelo
  • Josephine Smith

Abstract

Recent empirical work suggests that small price changes are relatively common. This evidence has been used to criticize classic menu-cost models. In this paper, we use scanner data from a national supermarket chain and micro data from the Consumer Price Index to reassess the importance of small price changes. We argue that the vast majority of these changes are due to measurement error. We conclude that the evidence on the prevalence of small price changes is much too weak to be used as a litmus test of nominal rigidity models.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17956.

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Date of creation: Mar 2012
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Publication status: published as Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo & Josephine Smith, 2014. "How Frequent Are Small Price Changes?," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 137-55, April.
Handle: RePEc:nbr:nberwo:17956

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  1. Barro, Robert J, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 39(1), pages 17-26, January.
  2. Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Macroeconomics, EconWPA 0402020, EconWPA.
  3. Mark Gertler & John Leahy, 2006. "A Phillips Curve with an Ss Foundation," NBER Working Papers 11971, National Bureau of Economic Research, Inc.
  4. Christian Broda & David E. Weinstein, 2007. "Product Creation and Destruction: Evidence and Price Implications," NBER Working Papers 13041, National Bureau of Economic Research, Inc.
  5. Caplin, A. & Leahy, J., 1989. "State-Dependent Pricing And The Dynamics Of Money And Output," Discussion Papers, Columbia University, Department of Economics 1989_32, Columbia University, Department of Economics.
  6. Alberto Cavallo & Roberto Rigobon, 2011. "The Distribution of the Size of Price Changes," NBER Working Papers 16760, National Bureau of Economic Research, Inc.
  7. Anil K Kashyap, 1994. "Sticky Prices: New Evidence from Retail Catalogs," NBER Working Papers 4855, National Bureau of Economic Research, Inc.
  8. Ricardo Reis, 2005. "Inattentive Producers," NBER Working Papers 11820, National Bureau of Economic Research, Inc.
  9. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2007. "Optimal Sticky Prices under Rational Inattention," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6243, C.E.P.R. Discussion Papers.
  10. Saroj Bhattarai & Raphael Schoenle, 2010. "Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices," Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies. 1245, Princeton University, Department of Economics, Center for Economic Policy Studies..
  11. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115, pages 171-199.
  12. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  13. Fernando Alvarez & Francesco Lippi, 2013. "Price setting with menu cost for multi-product firms," EIEF Working Papers Series 1302, Einaudi Institute for Economics and Finance (EIEF), revised Feb 2013.
  14. Ariel Burstein & Christian Hellwig, 2007. "Prices and Market Shares in a Menu Cost Model," NBER Working Papers 13455, National Bureau of Economic Research, Inc.
  15. Fernando E. Alvarez & Francesco Lippi & Luigi Paciello, 2010. "Optimal price setting with observation and menu costs," NBER Working Papers 15852, National Bureau of Economic Research, Inc.
  16. Filip Matejka, 2010. "Rationally Inattentive Seller: Sales and Discrete Pricing," CERGE-EI Working Papers, The Center for Economic Research and Graduate Education - Economic Institute, Prague wp408, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  17. Rotemberg, Julio J., 2005. "Customer anger at price increases, changes in the frequency of price adjustment and monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(4), pages 829-852, May.
  18. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(5), pages 947-985, October.
  19. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(4), pages 517-31, October.
  20. Burstein, Ariel T., 2006. "Inflation and output dynamics with state-dependent pricing decisions," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(7), pages 1235-1257, October.
  21. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 665-690, April.
  22. Fredrik Wulfsberg, 2009. "Price adjustments and inflation - evidence from Norwegian consumer price data 1975-2004," Working Paper, Norges Bank 2009/11, Norges Bank.
  23. Saul Lach & Daniel Tsiddon, 2007. "Small price changes and menu costs," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 28(7), pages 649-656.
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Cited by:
  1. Marco Bonomo & Marcelo Medeiros & Arnildo Correa, 2011. "Estimating Strategic Complementarity in a State-Dependent Pricing Model," 2011 Meeting Papers, Society for Economic Dynamics 691, Society for Economic Dynamics.
  2. Sudo, Nao & Ueda, Kozo & Watanabe, Kota, 2013. "Micro price dynamics during Japan's lost decades," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 159, Federal Reserve Bank of Dallas.
  3. Fernando Alvarez & Hervé Le Bihan & Francesco Lippi, 2013. "Small and Large Price Changes and the Propagation of Monetary Shocks," EIEF Working Papers Series 1318, Einaudi Institute for Economics and Finance (EIEF), revised Aug 2013.
  4. Etienne Gagnon & David López-Salido & Nicolas Vincent, 2012. "Individual Price Adjustment along the Extensive Margin," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2012, Volume 27, pages 235-281 National Bureau of Economic Research, Inc.
  5. Fernando E. Alvarez & Francesco Lippi, 2012. "Price Setting with menu cost for Multi-product firms," NBER Working Papers 17923, National Bureau of Economic Research, Inc.

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