Price Rigidity: Microeconomic Evidence and Macroeconomic Implications

Emi Nakamura and Jon Steinsson

Annual Review of Economics, 2013, vol. 5, issue 1, 133-163

Abstract: We review recent evidence on price rigidity from the macroeconomics literature and discuss how this evidence is used to inform macroeconomic modeling. Sluggish price adjustment is a leading explanation for the large effects of demand shocks on output and, in particular, the effects of monetary policy on output. A recent influx of data on individual prices has greatly deepened macroeconomists’ understanding of individual price dynamics. However, the analysis of these new data raises a host of new empirical issues that have not traditionally been confronted by parsimonious macroeconomic models of price setting. Simple statistics such as the frequency of price change may be misleading guides to the flexibility of the aggregate price level in a setting in which temporary sales, product churning, cross-sectional heterogeneity, and large idiosyncratic price movements play an important role. We discuss empirical evidence on these and other important features of micro price adjustment and ask how they affect the sluggishness of aggregate price adjustment and the economy’s response to demand shocks.

Keywords: temporary sales; monetary non-neutrality (search for similar items in EconPapers)
JEL-codes: E30 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (146)

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