Working Paper: NBER ID: w14787
Authors: Mark Bils; Peter J. Klenow; Benjamin A. Malin
Abstract: 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.
Keywords: reset price inflation; monetary policy shocks; pricing models; strategic complementarities
JEL Codes: E31; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strategic complementarities (D10) | reset price inflation (E31) |
| strategic complementarities (D10) | volatility of reset price inflation (E31) |
| time-dependent pricing models (L90) | persistence of reset price inflation (E31) |
| structure of pricing models (D49) | inflation persistence (E31) |
| absence of strategic complementarities (D10) | realistic inflation dynamics (E31) |
| nominal shock (D80) | reset prices (P22) |
| reset price inflation (E31) | lower inflation in subsequent months (E31) |