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Price dispersion and inflation: New facts and theoretical implications

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  • Sheremirov, Viacheslav

Abstract

In workhorse macroeconomic models, price dispersion is a central determinant of welfare, the cost of business cycles, optimal inflation, and the tradeoff between inflation and output stability. While price dispersion increases with inflation in the models, this relationship is negative in the data—due to sales prices. The comovement of price dispersion and inflation for regular prices is positive. A model with sales can quantitatively match the comovement in the data, whereas a range of similar models without sales cannot, even for regular prices. These findings have important implications for welfare calculations, optimal inflation, and the effects of monetary shocks.

Suggested Citation

  • Sheremirov, Viacheslav, 2020. "Price dispersion and inflation: New facts and theoretical implications," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 59-70.
  • Handle: RePEc:eee:moneco:v:114:y:2020:i:c:p:59-70
    DOI: 10.1016/j.jmoneco.2019.03.007
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    More about this item

    Keywords

    Inflation; Price dispersion; Sales; Sticky prices; Welfare;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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