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

Pete Klenow and Oleksiy Kryvtsov

Staff Working Papers from Bank of Canada

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 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.

Keywords: Inflation; and; prices (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2005
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (97)

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Related works:
Journal Article: State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation? (2008)
Working Paper: State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation? (2007)
Working Paper: State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation? (2005)
Working Paper: State-Dependent or Time-Dependent Pricing: Does It Matter For Recent U.S. Inflation? (2004)
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