Reference Prices and Nominal Rigidities

Martin Eichenbaum, Nir Jaimovich, Sergio Rebelo

NBER Working Paper No. 13829
Issued in March 2008, Revised in December 2011
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

We assess the importance of nominal rigidities using a new weekly scanner data set. We find that nominal rigidities are important but do not take the form of sticky prices. Instead, they take the form of inertia in reference prices and costs, defined as the most common prices and costs within a given quarter. Reference prices are particularly inertial and have an average duration of roughly one year, even though weekly prices change roughly every two weeks. We document the relation between prices and costs and find sharp evidence of state dependence in the probability of reference price changes and in the magnitude of these changes. We use a simple model to argue that reference prices and costs are useful statistics for macroeconomic analysis.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w13829

Published: Martin Eichenbaum, Nir Jaimovich and Sergio Rebelo, `Reference Prices and Nominal Rigidities’, American Economic Review , February 2011, vol. 101, issue 1, 242 272.