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Price Rigidity: Microeconomic Evidence and Macroeconomic Implications

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  • Emi Nakamura
  • Jón Steinsson

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 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18705.

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Date of creation: Jan 2013
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Publication status: published as Emi Nakamura & J�n Steinsson, 2013. "Price Rigidity: Microeconomic Evidence and Macroeconomic Implications," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 133-163, 05.
Handle: RePEc:nbr:nberwo:18705

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Cited by:
  1. Kevin J. Fox & Iqbal A. Syed, 2014. "Price Discounts and the Measurement of Inflation," Discussion Papers, School of Economics, The University of New South Wales 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, Society for Economic Dynamics 1216, Society for Economic Dynamics.

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