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The Role of Industrial Composition in Driving the Frequency of Price Change

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  • Christopher D. Cotton
  • Vaishali Garga

Abstract

We analyze the impact of shifts in the industrial composition of the economy on the distribution of the frequency of price change and its consequences for the slope of the Phillips curve for the United States. By combining product-level microdata on the frequency of price change with data on industry shares from 1947 through 2019, we document that shifts in industrial composition led to a gradual reduction in the median monthly frequency of price change from 9.2 percent in 1947 to 6.9 percent in 2019. Other percentiles of the distribution of the frequency of price change show similar reductions. These declines were broadly driven by a shift in the industrial composition of the economy from primary and secondary industries toward service industries. In a calibrated multisector general equilibrium menu cost model, we find that this effect flattened the Phillips curve by 28.5 percent from 1947 to 2019. However, despite a flatter Phillips curve, persistent shocks to aggregate demand still can cause significant inflation.

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  • Christopher D. Cotton & Vaishali Garga, 2022. "The Role of Industrial Composition in Driving the Frequency of Price Change," Working Papers 22-9, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:94618
    DOI: 10.29412/res.wp.2022.09
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    References listed on IDEAS

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    4. Jonathon Hazell & Juan Herreño & Emi Nakamura & Jón Steinsson, 2022. "The Slope of the Phillips Curve: Evidence from U.S. States," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(3), pages 1299-1344.
    5. Emi Nakamura & Jón Steinsson & Patrick Sun & Daniel Villar, 2018. "The Elusive Costs of Inflation: Price Dispersion during the U.S. Great Inflation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(4), pages 1933-1980.
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    Cited by:

    1. Luo, Shaowen & Villar, Daniel, 2023. "Propagation of shocks in an input-output economy: Evidence from disaggregated prices," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 26-46.

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    More about this item

    Keywords

    industrial composition; inflation; services; price rigidity; Phillips curve;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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