State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?

54 Pages Posted: 9 Feb 2005 Last revised: 5 Sep 2010

See all articles by Peter J. Klenow

Peter J. Klenow

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Oleksiy Kryvtsov

Bank of Canada

Date Written: January 2005

Abstract

Inflation equals the product of two terms: an extensive margin (the fraction of items with price changes) and an intensive margin (the average size of those price changes). The variance of inflation over time can be decomposed into contributions from each margin. The extensive margin figures importantly in many state-dependent pricing models, whereas the intensive margin is the sole source of inflation changes in staggered time-dependent pricing models. We use micro data collected by the U.S. Bureau of Labor Statistics to decompose the variance of consumer price inflation from 1988 through 2003. We find that around 95% of the variance of monthly inflation stems from fluctuations in the average size of price changes, i.e., the intensive margin. When we calibrate a prominent state-dependent pricing model to match this empirical variance decomposition, the model's shock responses are very close to those in time-dependent pricing models.

Suggested Citation

Klenow, Peter J. and Kryvtsov, Oleksiy, State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation? (January 2005). NBER Working Paper No. w11043. Available at SSRN: https://ssrn.com/abstract=648945

Peter J. Klenow (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Oleksiy Kryvtsov

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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