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American Economic Review Vol. 101 No. 1 2011

Reference Prices, Costs, and Nominal Rigidities

Martin Eichenbaum1; Nir Jaimovich2; Sergio Rebelo3

1 Department of Economics, Northwestern University, 2001 Sheridan Rd., Evanston, IL 60208-2600 and National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138. · 2 Department of Economics, Stanford University, 579 Serra Mall, Stanford, CA, 94305-6072, and National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138. · 3 Kellogg School of Management, Northwestern University, 2001 Sheridan Rd., Evanston, IL 60208-2600 and National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138.

Abstract

We assess the importance of nominal rigidities using a new weekly scanner dataset. We find that nominal rigidities 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 once every two weeks. We document the relation between prices and costs and find sharp evidence of state dependence in prices. We use a simple model to argue that reference prices and costs are useful statistics for macroeconomic analysis.

DOI
10.1257/aer.101.1.234
Volume
101
Issue
1
Pages
234-262
Language
en
Sources
crossref bibtex:phds-export.bib openalex

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