Prices are Sticky after All

63 Pages Posted: 20 Sep 2010 Last revised: 22 Sep 2010

See all articles by Patrick J. Kehoe

Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Virgiliu Midrigin

New York University (NYU) - Department of Economics

Date Written: September 2010

Abstract

Recent studies say prices change every four months. Economists have interpreted this high frequency as evidence against the importance of sticky prices for the monetary transmission mechanism. Theory implies that if most price changes are regular, as they are in the standard New Keynesian model, then this interpretation is correct. But, if most price changes are temporary, as they are in the data, then it is incorrect. Temporary changes have two striking features: after a change, the nominal price returns exactly to its pre-existing level, and temporary changes are clustered in time. Our model, which replicates these features, implies that temporary changes cannot offset monetary shocks well, whereas regular changes can. Since regular prices are much stickier than temporary ones, our model, in which prices change as frequently as they do in the micro data, predicts that the aggregate price level is as sticky as in a standard model in which micro level prices change once every 12 months. In this sense, prices are sticky after all.

Suggested Citation

Kehoe, Patrick J. and Midrigin, Virgiliu, Prices are Sticky after All (September 2010). NBER Working Paper No. w16364. Available at SSRN: https://ssrn.com/abstract=1679262

Patrick J. Kehoe (Contact Author)

Federal Reserve Bank of Minneapolis - Research Department ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States
612-204-5525 (Phone)
612-204-5515 (Fax)

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Virgiliu Midrigin

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

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