Price Rigidity: Microeconomic Evidence and Macroeconomic Implications

Abstract

We review recent evidence on price rigidity from the macroeconomics literature, and discuss how this evidence is used to inform macroeconomic modeling. Sluggish price adjustment is a leading explanation for large effects of demand shocks on output and, in particular, the effects of monetary policy on output. A recent influx of data on individual prices has greatly deepened macroeconomists' understanding of individual price dynamics. However, the analysis of these new data raise a host of new empirical issues that have not traditionally been confronted by parsimonious macroeconomic models of price-setting. Simple statistics such as the frequency of price change may be misleading guides to the flexibility of the aggregate price level in a setting where temporary sales, product-churning, cross-sectional heterogeneity, and large idiosyncratic price movements play an important role. We discuss empirical evidence on these and other important features of micro price adjustment and ask how they affect the sluggishness of aggregate price adjustment and the economy's response to demand shocks.

Nominal Rigidities and Asset Pricing

“…Kaltenbrunner and Lochstoer (2010) and Croce (2012) document that long-run 8 Other recent contributions to this literature are Golosov and Lucas Jr. (2007), Klenow and Willis (2007), Kryvtsov (2008), Knotek II (2008), Eichenbaum, Jaimovich, and Rebelo (2011), Midrigan (2011), Anderson, Jaimovich, and Simester (2012, Kehoe and Midrigan (2012), Bhattarai and Schoenle (2012), Eichenbaum, Jaimovich, Rebelo, and Smith (2013), Kaplan andMenzio (2013), andVavra (2013). Klenow and Malin (2010) and Nakamura and Steinsson (2013) provide excellent reviews of the recent literature on price rigidity using micro price data.…”

Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks

“…A large literature documents short-term price stickiness and less than perfect pass-through of higher costs to consumers. (See, for example, Klenow and Kryvtsov (2008), Klenow and Malin (2010), Nakamura and Steinsson (2013), and Gopinath and Rigobon (2008)). …”

Retail price dynamics and retailer heterogeneity: UK evidence

“…1 Recent reviews of this literature can be found in Klenow and Malin (2010), Maćkowiak and Smets (2008) and Nakamura and Steinsson (2013 Gagnon and Lopez-Salido (2014). Defining prices in this way induces 'noise' in the data (see Eichenbaum et al, 2014) and about half of the price changes observed in the raw data are less than one penny.…”