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Reset Price Inflation and the Impact of Monetary Policy Shocks

  • Mark Bils
  • Peter J. Klenow
  • Benjamin A. Malin

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14787.

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Date of creation: Mar 2009
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Publication status: published as Mark Bils & Peter J. Klenow & Benjamin A. Malin, 2012. "Reset Price Inflation and the Impact of Monetary Policy Shocks," American Economic Review, American Economic Association, vol. 102(6), pages 2798-2825, October.
Handle: RePEc:nbr:nberwo:14787
Note: EFG ME
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