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In Search of Real Rigidities

  • Gita Gopinath
  • Oleg Itskhoki

The closed and open economy literatures work on evaluating the role of real rigidities, but in parallel. This paper brings the two literatures together. We use international price data and exchange rate shocks to evaluate the importance of real rigidities in price setting. We show that consistent with the presence of real rigidities the response of reset-price inflation to exchange rate shocks depicts significant persistence. Individual import prices, conditional on changing, respond to exchange rate shocks prior to the last price change. At the same time aggregate reset-price inflation for imports, like that for consumer prices, depicts little persistence. Competitor prices affect firm pricing, and exchange rate pass-through into import prices is greater in response to trade-weighted as opposed to bilateral exchange rate shocks. We quantitatively evaluate sticky price models (Calvo and menu cost) with variable markups at the wholesale level and constant markups at the retail level, consistent with empirical evidence. Variable markups alone generate price sluggishness at the aggregate level, while they fall short of matching price persistence at the micro level. Finally, variable markups magnify the size of the contract multiplier, but their absolute effects are modest unless they are coupled with exogenous sources of persistence.

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File URL: http://www.nber.org/papers/w16065.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16065.

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Date of creation: Jun 2010
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Publication status: published as In Search of Real Rigidities , Gita Gopinath, Oleg Itskhoki. in NBER Macroeconomics Annual 2010, Volume 25 , Acemoglu and Woodford. 2011
Handle: RePEc:nbr:nberwo:16065
Note: EFG IFM ME
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  1. Berman, Nicolas & Martin, Philippe & Mayer, Thierry, 2009. "How do different exporters react to exchange rate changes? Theory, empirics and aggregate implications," CEPR Discussion Papers 7493, C.E.P.R. Discussion Papers.
  2. Pinelopi K. Goldberg & Rebecca Hellerstein, 2007. "A framework for identifying the sources of local currency price stability with an empirical application," Staff Reports 287, Federal Reserve Bank of New York.
  3. Jonathan L. Willis & Peter J. Klenow, 2007. "Real Rigidities and Nominal Price Changes," 2007 Meeting Papers 844, Society for Economic Dynamics.
  4. Gopinath, Gita & Gourinchas, Pierre-Olivier & Hsieh, Chang-Tai & Li, Nicholas, 2009. "Estimating the Border Effect: Some New Evidence," CEPR Discussion Papers 7281, C.E.P.R. Discussion Papers.
  5. Pete Klenow & Ben Malin & Mark Bils, 2010. "Reset Price Inflation and the Impact of Monetary Policy Shocks," 2010 Meeting Papers 1079, Society for Economic Dynamics.
  6. Burstein, Ariel Tomas & Hellwig, Christian, 2007. "Prices and Market Shares in a Menu Cost Model," CEPR Discussion Papers 6504, C.E.P.R. Discussion Papers.
  7. Richard Pomfret & Patricia Sourdin, 2008. "Why Do Trade Costs Vary?," School of Economics Working Papers 2008-08, University of Adelaide, School of Economics.
  8. Emi Nakamura & Dawit Zerom, 2009. "Accounting for Incomplete Pass-Through," NBER Working Papers 15255, National Bureau of Economic Research, Inc.
  9. Basu, S., 1993. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," Papers 93-23, Michigan - Center for Research on Economic & Social Theory.
  10. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November.
  11. Gita Gopinath & Roberto Rigobon, 2008. "Sticky Borders," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 531-575, 05.
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