Reset price inflation and the impact of monetary policy shocks
Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, 2009 - Business & Economics - 58 pages
A standard state-dependent pricing model generates little monetary non-neutrality. Two ways of generating more meaningful real effects are time-dependent pricing and strategic complementarities. These mechanisms have telltale implications for the persistence and volatility of "reset price inflation." Reset price inflation is the rate of change of all desired prices (including for goods that have not changed price in the current period). Using the micro data underpinning the CPI, we construct an empirical measure of reset price inflation. We find that time-dependent models imply unrealistically high persistence and stability of reset price inflation. This discrepancy is exacerbated by adding strategic complementarities, even under state-dependent pricing. A state-dependent model with no strategic complementarities aligns most closely with the data.
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actual price inﬂation aggregate shock average changers composite consumption conﬁdence interval CPI-RDB discount factor Economics Discussion Series endogenous monetary policy Estimates reﬂect accumulated Federal Reserve Board Figure Finance and Economics ﬁnd ﬁrst ﬂexible and sticky ﬂexible sector frequency of price Golosov and Lucas high contract multiplier idiosyncratic shocks individual price inﬂation persistence Klenow labor supply Mark Bils measure of reset model with strategic Monetary Policy Shocks monetary shocks money growth money supply month monthly lags Nakamura and Steinsson parameters percent persistence of reset price stickiness productivity shock proﬁts quote-lines random walk real effects reﬂect accumulated responses reset and actual reset inﬂation reset price inﬂation Response of Reset sale prices sampling error SDP Comps SDP Endo SDP model serial correlation Speciﬁcally standard deviation state-dependent sticky group sticky price sticky sector strategic complementarities Summary Statistics TDP and SDP theoretical reset price univariate variance volatility of reset weights