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Real Rigidities and Nominal Price Changes By Peter J. Klenow and
Jonathan L. Willis |
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Abstract A large literature seeks to provide
microfoundations of price setting for macro models. A challenge has been to
develop a model in which monetary policy shocks have the highly persistent
effects on real variables estimated by many studies. Nominal price
stickiness has proved helpful but not sufficient without some form of "real
rigidity" or "strategic complementarity." We embed a model with a real
rigidity a la Kimball (1995), wherein consumers flee from relatively
expensive products but do not flock to inexpensive ones. We estimate key
model parameters using micro data from the U.S. CPI, which exhibit sizable
movements in relative prices of substitute products. When we impose a
significant degree of real rigidity, fitting the micro price facts requires
very large idiosyncratic shocks and implies large movements in micro
quantities. Keywords: state dependent pricing, real rigidities Back to top RWP home |
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