Working Paper: NBER ID: w17956
Authors: Martin S. Eichenbaum; Nir Jaimovich; Sergio Rebelo; Josephine Smith
Abstract: Recent empirical work suggests that small price changes are relatively common. This evidence has been used to criticize classic menu-cost models. In this paper, we use scanner data from a national supermarket chain and micro data from the Consumer Price Index to reassess the importance of small price changes. We argue that the vast majority of these changes are due to measurement error. We conclude that the evidence on the prevalence of small price changes is much too weak to be used as a litmus test of nominal rigidity models.
Keywords: price changes; nominal rigidity; measurement error; scanner data; CPI
JEL Codes: E3; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| measurement errors in data collection methods (C83) | prevalence of small price changes is significantly overstated (E30) |
| use of UVIs (C26) | leftward shift in the distribution of price changes (D39) |
| correcting for measurement errors (C20) | fraction of small price changes declines dramatically (E30) |
| measurement errors in CPI data (C43) | artifacts of small price changes (E30) |
| small price changes (D41) | challenge to existing models of nominal rigidity (C54) |