Price Rigidity: Microeconomic Evidence and Macroeconomic Implications
AbstractWe 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 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 raise 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 where 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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18705.
Date of creation: Jan 2013
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Find related papers by JEL classification:
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-26 (All new papers)
- NEP-HME-2013-01-26 (Heterodox Microeconomics)
- NEP-MAC-2013-01-26 (Macroeconomics)
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- Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo, 2011. "Reference Prices, Costs, and Nominal Rigidities," American Economic Review, American Economic Association, vol. 101(1), pages 234-62, February.
- Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2007.
"Currency Choice and Exchange Rate Pass-through,"
NBER Working Papers
13432, National Bureau of Economic Research, Inc.
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