Real Rigidities and Nominal Price Changes

FRB of Kansas City Working Paper No. RWP06-03

48 Pages Posted: 2 May 2006

See all articles by Peter J. Klenow

Peter J. Klenow

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

Jonathan L. Willis

Federal Reserve Bank of Kansas City

Multiple version iconThere are 2 versions of this paper

Date Written: March 2006

Abstract

A large literature seeks to provide microfoundations of price setting for macro models. A challenge has been to develop a model in which monetary policy shocks have the highly persistent effects on real variables estimated by many studies. Nominal price stickiness has proved helpful but not sufficient without some form of real rigidity or strategic complementarity. We embed a model with a real rigidity a la Kimball (1995), wherein consumers flee from relatively expensive products but do not flock to inexpensive ones. We estimate key model parameters using micro data from the U.S. CPI, which exhibit sizable movements in relative prices of substitute products. When we impose a significant degree of real rigidity, fitting the micro price facts requires very large idiosyncratic shocks and implies large movements in micro quantities.

Keywords: State Dependent Pricing, Real Rigidities

JEL Classification: E3, L16

Suggested Citation

Klenow, Peter J. and Willis, Jonathan, Real Rigidities and Nominal Price Changes (March 2006). Available at SSRN: https://ssrn.com/abstract=896325 or http://dx.doi.org/10.2139/ssrn.896325

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

Jonathan Willis

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States
816-881-2852 (Phone)
816-881-2199 (Fax)

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