Some Evidence on the Importance of Sticky Prices

Abstract

We examine the frequency of price changes for 350 categories of goods and services covering about 70% of consumer spending, based on unpublished data from the BLS for 1995 to 1997. Compared with previous studies we find much more frequent price changes, with half of prices lasting less than 4.3 months. The frequency of price changes differs dramatically across categories. We exploit this variation to ask how inflation for "flexible-price goods" (goods with frequent changes in individual prices) differs from inflation for "sticky-price goods" (those displaying infrequent price changes). Compared to the predictions of popular sticky price models, actual inflation rates are far more volatile and transient, particularly for sticky-price goods.

Real Rigidities and the Cross-Sectional Distribution of Price Stickiness: Evidence from Micro and Macro Data Combined

“…According to Klenow and Malin's (2011) survey of the empirical literature based on micro data, prices change, on average, at least once a year -somewhat more often than we thought was the case prior to Bils and Klenow (2004). In contrast, making sense of estimates of the response of the aggregate price level to monetary shocks (from dynamic stochastic general equilibrium -DSGE -models, or vector autoregressions) requires much less frequent price adjustments.…”

“…Hence, 2 Carvalho and Schwartzman (2014) show how this intuition can be formalized in terms of a "selection e¤ect" relative to the timing of price changes, which arises in the class of time-dependent pricing models. 3 Nakamura and Steinsson (2010) conclude that this interaction is not important in their calibrated menu-cost model. 4 Coibion et al (2014) provide evidence that sales are essentially acyclical -which is consistent with the models in Guimaraes and Sheedy (2011) and Kehoe and Midrigan (2014).…”

“…In the decade since the publication of the seminal Bils and Klenow (2004) paper, the availability of large amounts of micro price data has rekindled interest in this area, and allowed us to make progress. Yet, estimates of the extent of nominal price stickiness based on microeconomic data versus those based on aggregate data usually produce a con ‡icting picture.…”

“…The other two mechanisms are motivated by the empirical evidence uncovered since Bils and Klenow (2004), and subsequent theoretical literature. Cross-sectional heterogeneity in price rigidity, to the extent documented in the micro data, can lead to much larger monetary non-neutralities than the 1 See, for example, the survey by Maćkowiak and Smets (2008).…”

“…In those circumstances, …rms in the more sticky sectors become disproportionately important in shaping aggregate dynamics (relative to their sectoral weight), through their in ‡uence on pricing decisions of …rms that change prices more frequently (Carvalho 2006). 3 The third mechanism is the presence of sales and other temporary price changes. Guimaraes and Sheedy (2011) and Kehoe and Midrigan (2014) show that such price changes may help reconcile frequent micro adjustments with a sluggish aggregate price response to nominal disturbances.…”