TY - JOUR AU - Gopinath, Gita AU - Itskhoki, Oleg TI - In Search of Real Rigidities JF - National Bureau of Economic Research Working Paper Series VL - No. 16065 PY - 2010 Y2 - June 2010 DO - 10.3386/w16065 UR - http://www.nber.org/papers/w16065 L1 - http://www.nber.org/papers/w16065.pdf N1 - Author contact info: Gita Gopinath Department of Economics Harvard University 1875 Cambridge Street Littauer 206 Cambridge, MA 02138 Tel: 617/495-8161 Fax: 617/495-7730 E-Mail: gopinath@harvard.edu Oleg Itskhoki Department of Economics University of California, Los Angeles Bunche Hall, 315 Portola Plaza Los Angeles, CA 90095-1477 Tel: 609/216-4489 E-Mail: itskhoki@econ.ucla.edu M1 - published as Gita Gopinath, Oleg Itskhoki. "In Search of Real Rigidities," in Daron Acemoglu and Michael Woodford, editors, "NBER Macroeconomics Annual 2010, Volume 25" University of Chicago Press (2011) M3 - presented at "25th Annual Conference on Macroeconomics", April 9-10, 2010 AB - The closed and open economy literatures work on evaluating the role of real rigidities, but in parallel. This paper brings the two literatures together. We use international price data and exchange rate shocks to evaluate the importance of real rigidities in price setting. We show that consistent with the presence of real rigidities the response of reset-price inflation to exchange rate shocks depicts significant persistence. Individual import prices, conditional on changing, respond to exchange rate shocks prior to the last price change. At the same time aggregate reset-price inflation for imports, like that for consumer prices, depicts little persistence. Competitor prices affect firm pricing, and exchange rate pass-through into import prices is greater in response to trade-weighted as opposed to bilateral exchange rate shocks. We quantitatively evaluate sticky price models (Calvo and menu cost) with variable markups at the wholesale level and constant markups at the retail level, consistent with empirical evidence. Variable markups alone generate price sluggishness at the aggregate level, while they fall short of matching price persistence at the micro level. Finally, variable markups magnify the size of the contract multiplier, but their absolute effects are modest unless they are coupled with exogenous sources of persistence. ER -