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Reset Price Inflation and the Impact of Monetary Policy Shocks

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  • Mark Bils

    (University of Rochester)

  • Pete Klenow

    ()
    (Department of Economics, Stanford University)

  • Benjamin Malin

    (Federal Reserve Boards)

Abstract

A standard state-dependent pricing model generates little monetary non-neutrality. Two ways of generating more meaningful real effects are time-dependent pricing and strategic complementarities. These mechanisms have telltale implications for the persistence and volatility of “reset price inflation.” Reset price inflation is the rate of change of all desired prices (including for goods that have not changed price in the current period). Using the micro data underpinning the CPI, we construct an empirical measure of reset price inflation. We find that time-dependent models imply unrealistically high persistence and stability of reset price inflation. This discrepancy is exacerbated by adding strategic complementarities, even under state-dependent pricing. A state-dependent model with no strategic complementarities aligns most closely with the data.

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Bibliographic Info

Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 08-041.

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Date of creation: Feb 2009
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Handle: RePEc:sip:dpaper:08-041

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Keywords: time-dependent pricing; strategic complementarities; pricing model; reset price inflation;

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