NBER WORKING PAPER SERIES
REFERENCE PRICES AND NOMINAL RIGIDITIES Martin Eichenbaum Nir Jaimovich Sergio Rebelo Working Paper 13829 http://www.nber.org/papers/w13829
NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2008
We would like to thank Eric Anderson, Liran Einav, Pete Klenow, John Leahy, Aviv Nevo, Frank Smets, and Sofia Villas-Boas for their comments. We gratefully acknowledge financial support from the National Science Foundation. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. © 2008 by Martin Eichenbaum, Nir Jaimovich, and Sergio Rebelo. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
Reference Prices and Nominal Rigidities Martin Eichenbaum, Nir Jaimovich, and Sergio Rebelo NBER Working Paper No. 13829 March 2008, Revised September 2009 JEL No. E30 ABSTRACT We assess the importance of nominal rigidities using a new weekly scanner data set. We find that nominal rigidities are important but do not take the form of sticky prices. Instead, they take the form of inertia in reference prices and costs, defined as the most common prices and costs within a given quarter. Reference prices are particularly inertial and have an average duration of roughly one year, even though weekly prices change roughly every two weeks. We document the relation between prices and costs and find sharp evidence of state dependence in the probability of reference price changes and in the magnitude of these changes. We use a simple model to argue that reference prices and costs are useful statistics for macroeconomic analysis.
Martin Eichenbaum Department of Economics Northwestern University 2003 Sheridan Road Evanston, IL 60208 and NBER
[email protected] Nir Jaimovich Department of Economics 579 Serra Mall Stanford University Stanford, CA 94305-6072 and NBER
[email protected]
Sergio Rebelo Northwestern University Kellogg School of Management Department of Finance Leverone Hall Evanston, IL 60208-2001 and NBER
[email protected]
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Data Menu cost value as percentage of steady state cash flow
Weekly cost volatility Weekly price volatility Weekly quantity volatility Frequency of weekly price changes Frequency of weekly cost changes Frequency of reference price changes Frequency of reference costs changes Fraction of price changes without cost changes Frequency of plan changes
0.120 0.140 0.530 0.430 0.490 0.270 0.450 0.030
Sticky plan model 0.0525
0.112 0.111 0.600 0.375 0.577 0.268 0.634 0.011 0.023
Menu cost Menu cost calibrated to model calibrated the frequency to frequency of of weekly price reference price changes changes 0.0100 0.4593
0.113 0.113 0.599 0.402 0.574 0.670 0.628 0.009
0.112 0.075 0.416 0.155 0.576 0.269 0.635 0.003
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Distribution of percentage of weeks spent at reference price
Distribution of percentage ot total quantity sold at reference price
0.25
0.035
0.03 0.2 0.025
Frequency
Frequency
0.15 0.02
0.015
0.1
0.01 0.05 0.005
0
0
0.1
0.2
0.3
0.4
0.5
0.6
Percentage
0.7
0.8
0.9
1
0
0
0.1
0.2
0.3
0.4
0.5
0.6
Percentage
0.7
0.8
0.9
1
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Distribution of weekly price duration 0.14 0.12
Frequency
0.1 0.08 0.06 0.04 0.02 0
0
50
100
150
weeks
Distribution of reference price duration 0.35 0.3
Frequency
0.25 0.2 0.15 0.1 0.05 0
0
50
100
weeks
150
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Distribution of percentage of weeks spent at reference cost 0.25
0.2
Frequency
0.15
0.1
0.05
0
0
0.1
0.2
0.3
0.4
0.5
Percentage
0.6
0.7
0.8
0.9
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Distribution of weekly cost duration 0.16 0.14
Frequency
0.12 0.1 0.08 0.06 0.04 0.02 0
0
50
100
150
weeks
Distribution of reference cost duration 0.18 0.16 0.14
Frequency
0.12 0.1 0.08 0.06 0.04 0.02 0
0
50
100
weeks
150
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Probability of a change in the reference cost (C)
0.9
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