Reference Prices and Nominal Rigidities

NBER WORKING PAPER SERIES

REFERENCE PRICES AND NOMINAL RIGIDITIES

Martin EichenbaumNir JaimovichSergio Rebelo

Working Paper 13829http://www.nber.org/papers/w13829

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138March 2008

We would like to thank Eric Anderson, Liran Einav, Pete Klenow, John Leahy, Aviv Nevo, FrankSmets, and Sofia Villas-Boas for their comments. We gratefully acknowledge financial support fromthe National Science Foundation. The views expressed herein are those of the author(s) and do notnecessarily reflect the views of the National Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies officialNBER publications.

© 2008 by Martin Eichenbaum, Nir Jaimovich, and Sergio Rebelo. All rights reserved. Short sectionsof text, not to exceed two paragraphs, may be quoted without explicit permission provided that fullcredit, including © notice, is given to the source.

Reference Prices and Nominal RigiditiesMartin Eichenbaum, Nir Jaimovich, and Sergio RebeloNBER Working Paper No. 13829March 2008, Revised September 2009JEL No. E30

ABSTRACT

We assess the importance of nominal rigidities using a new weekly scanner data set. We find that nominalrigidities are important but do not take the form of sticky prices. Instead, they take the form of inertiain 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 thoughweekly prices change roughly every two weeks. We document the relation between prices and costsand find sharp evidence of state dependence in the probability of reference price changes and in themagnitude of these changes. We use a simple model to argue that reference prices and costs are usefulstatistics for macroeconomic analysis.

Martin EichenbaumDepartment of EconomicsNorthwestern University2003 Sheridan RoadEvanston, IL 60208and [email protected]

Nir JaimovichDepartment of Economics579 Serra MallStanford UniversityStanford, CA 94305-6072and [email protected]

Sergio RebeloNorthwestern UniversityKellogg School of ManagementDepartment of FinanceLeverone HallEvanston, IL 60208-2001and [email protected]

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Data

Sticky plan

model

Menu cost

calibrated to

the frequency

of weekly price

changes

Menu cost

model calibrated

to frequency of

reference price

changes

Menu cost value as percentage of steady state cash flow 0.0525 0.0100 0.4593

Weekly cost volatility 0.120 0.112 0.113 0.112

Weekly price volatility 0.140 0.111 0.113 0.075

Weekly quantity volatility 0.530 0.600 0.599 0.416

Frequency of weekly price changes 0.430 0.375 0.402 0.155

Frequency of weekly cost changes 0.490 0.577 0.574 0.576

Frequency of reference price changes 0.270 0.268 0.670 0.269

Frequency of reference costs changes 0.450 0.634 0.628 0.635

Fraction of price changes without cost changes 0.030 0.011 0.009 0.003

Frequency of plan changes 0.023

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0.25

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Percentage

Fre

quency

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Distribution of reference price duration

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Fre

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Distribution of reference cost duration

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