The Role of Industrial Composition in Driving the Frequency of Price Change

Christopher Cotton and Vaishali Garga

No 22-9, Working Papers from Federal Reserve Bank of Boston

Abstract: We analyze the impact of shifts in the industrial composition of the economy on the distribution of the frequency of price change and its consequences for the slope of the Phillips curve for the United States. By combining product-level microdata on the frequency of price change with data on industry shares from 1947 through 2019, we document that shifts in industrial composition led to a gradual reduction in the median monthly frequency of price change from 9.2 percent in 1947 to 6.9 percent in 2019. Other percentiles of the distribution of the frequency of price change show similar reductions. These declines were broadly driven by a shift in the industrial composition of the economy from primary and secondary industries toward service industries. In a calibrated multisector general equilibrium menu cost model, we find that this effect flattened the Phillips curve by 28.5 percent from 1947 to 2019. However, despite a flatter Phillips curve, persistent shocks to aggregate demand still can cause significant inflation.

Keywords: industrial composition; inflation; services; price rigidity; Phillips curve (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Pages: 63
Date: 2022-06-01
New Economics Papers: this item is included in nep-his and nep-mon
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DOI: 10.29412/res.wp.2022.09

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