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Understanding and Modelling Reset Price Inflation

  • Engin Kara


Bils, Klenow and Malin (forthcoming) (BKM) constructed a measure of reset price inflation (i.e. the rate of change of all "desired" prices) for the US. They argue that the existing pricing models cannot explain the observed reset inflation and aggregate inflation. In this paper, I show that a model that can account for the heterogeneity in contract lengths we observe in the data matches the data on both series. I also show that the BKM measure of reset inflation is a flawed measure of the concept they wish to measure and can be quite misleading.

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Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 11/623.

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Length: 32 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:bri:uobdis:11/623
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  1. Dixon, Huw David & Kara, Engin, 2008. "Can we explain inflation persistence in a way that is consistent with the micro-evidence on nominal rigidity?," Cardiff Economics Working Papers E2008/22, Cardiff University, Cardiff Business School, Economics Section.
  2. Mark Bils & Peter J. Klenow & Benjamin A. Malin, 2009. "Reset Price Inflation and the Impact of Monetary Policy Shocks," NBER Working Papers 14787, National Bureau of Economic Research, Inc.
  3. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
  4. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  5. Kara, Engin, 2006. "Optimal monetary policy in the generalized Taylor economy," Working Paper Series 0673, European Central Bank.
  6. Levin, Andrew T., 2005. "Comment on: "Endogenous objectives and the evaluation of targeting rules for monetary policy"," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 913-919, July.
  7. Dixon, Huw & Kara, Engin, 2011. "Contract length heterogeneity and the persistence of monetary shocks in a dynamic generalized Taylor economy," European Economic Review, Elsevier, vol. 55(2), pages 280-292, February.
  8. Levin, Andrew T. & David López-Salido, J. & Nelson, Edward & Yun, Tack, 2008. "Macroeconometric equivalence, microeconomic dissonance, and the design of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages S48-S62, October.
  9. Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Working Papers 05-4, Bank of Canada.
  10. Huw Dixon & Engin Kara, 2005. "How to Compare Taylor and Calvo Contracts: a comment on Michael Kiley," CDMA Working Paper Series 200504, Centre for Dynamic Macroeconomic Analysis.
  11. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  12. Yuriy Gorodnichenko & Matthew D. Shapiro, 2006. "Monetary Policy When Potential Output is Uncertain: Understanding the Growth Gamble of the 1990s," NBER Working Papers 12268, National Bureau of Economic Research, Inc.
  13. Rochelle M. Edge, 2001. "Online Appendix to "The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models"," Technical Appendices edge01, Review of Economic Dynamics.
  14. Walsh, Carl E., 2005. "Endogenous objectives and the evaluation of targeting rules for monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 889-911, July.
  15. Robert J. Shiller, 1991. "Arithmetic Repeat Sales Price Estimators," Cowles Foundation Discussion Papers 971, Cowles Foundation for Research in Economics, Yale University.
  16. Rochelle M. Edge, 2000. "The equivalence of wage and price staggering in monetary business cycle models," International Finance Discussion Papers 672, Board of Governors of the Federal Reserve System (U.S.).
  17. Juillard, Michel, 1996. "Dynare : a program for the resolution and simulation of dynamic models with forward variables through the use of a relaxation algorithm," CEPREMAP Working Papers (Couverture Orange) 9602, CEPREMAP.
  18. Dixon, Huw, 2006. "The distribution of contract durations across firms: a unified framework for understanding and comparing dynamic wage and price setting models," Working Paper Series 0676, European Central Bank.
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