Economists have interpreted the evidence that prices change every four months as implying that sticky prices cannot be important for monetary transmission. Theory implies that this interpretation is correct if most price changes are regular, but not if a large fraction are temporary, as in the data. Since regular prices are much stickier than temporary ones, our models predict that the stickiness of the aggregate price level matches that in a standard Calvo model or a standard menu cost model in which micro-level prices change about once a year. In this sense, prices are sticky after all.
Bibliographical noteFunding Information:
This paper is a greatly revised version of earlier drafts titled “Sales and the Real Effects of Monetary Policy” and “Temporary Price Changes and the Real Effects of Monetary Policy.” We thank Kathy Rolfe and Joan Gieseke for excellent editorial assistance. Kehoe thanks the National Science Foundation for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
© 2015 The Authors.
- Menu costs
- Sticky prices