Working Paper: NBER ID: w18705
Authors: Emi Nakamura; J. N. Steinsson
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.
Keywords: Price Rigidity; Microeconomic Evidence; Macroeconomic Implications
JEL Codes: E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demand shocks (E39) | Output (Y10) |
| Sluggish price adjustment (E31) | Output (Y10) |
| Monetary shocks (E39) | Output (Y10) |
| Price rigidity (D41) | Non-neutrality of monetary shocks (E49) |
| Coordination failures among price setters (D43) | Sluggishness of aggregate price level (E31) |
| Fiscal stimulus (E62) | Output (Y10) |
| Sluggish price adjustment (E31) | Impact of fiscal policy (E62) |
| Demand shocks (E39) | Real interest rates (E43) |