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State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?

Author

Listed:
  • Peter J. Klenow

    () (Stanford University)

  • Oleksiy Kryvtsov

    () (Bank of Canada)

Abstract

In the 1988-2004 micro data collected by the U.S. Bureau of Labor Statistics for the CPI, price changes are frequent (every 4-7 months, depending on the treatment of sale prices) and large in absolute value (on the order of 10%). The size and timing of price changes varies considerably for a given item, but the size and probability of a price change are unrelated to the time since the last price change. Movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price, due to offsetting movements in the fraction of price increases and decreases. Neither leading time-dependent models (Taylor or Calvo) nor 1st generation state-dependent models match all of these facts. Some 2nd generation state-dependent models, however, appear broadly consistent with the empirical patterns.

Suggested Citation

  • Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers 07-007, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:07-007
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    References listed on IDEAS

    as
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    Keywords

    inflation; U.S.; state-dependent; time-dependent; CPI;

    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

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