Reference Prices and Nominal Rigidities

50 Pages Posted: 10 Jun 2008

See all articles by Martin Eichenbaum

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

Nir Jaimovich

University of Zurich

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Date Written: February 2008

Abstract

We assess the importance of nominal rigidities using a new weekly scanner data set from a major U.S. retailer, that contains information on prices, quantities, and costs for over 1,000 stores. We find that nominal rigidities are important but do not take the form of sticky prices. Instead, nominal rigidities take the form of inertia in reference prices and costs, defined as the most common prices and costs within a given quarter. Weekly prices and costs fluctuate around reference values which tend to remain constant over extended periods of time. Reference prices are particularly inertial and have an average duration of roughly one year. So, nominal rigidities are present in our data, even though weekly prices change very frequently, roughly once every two weeks. We argue that the retailer chooses the frequency with which it resets references prices so as to keep the realized markups within plus/minus twenty percent of the desired markup over reference cost.

Keywords: markups, nominal cost inertia, nominal price inertia

JEL Classification: E30

Suggested Citation

Eichenbaum, Martin and Jaimovich, Nir and Tavares Rebelo, Sergio, Reference Prices and Nominal Rigidities (February 2008). , Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1141615

Martin Eichenbaum (Contact Author)

Northwestern University ( email )

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Nir Jaimovich

University of Zurich ( email )

Sergio Tavares Rebelo

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Leverone Hall
Evanston, IL 60208
United States
847-467-2329 (Phone)
847-491-5719 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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