Prices Are Sticky After All

Creator Series Issue number
  • 413
Date Created
  • 2012-07-16
  • Recent studies say prices change about every four months. Economists have interpreted this high frequency as evidence against the importance of sticky prices for the real effects of monetary policy. Theory implies that this interpretation is correct if most price changes are regular, but not if most are temporary, as in the data. Temporary changes have a striking feature: after such a change, the nominal price tends to return exactly to its preexisting level. We study versions of Calvo and menu cost models that replicate this feature. Both models predict that the degree of aggregate price stickiness is determined mostly by the frequency of regular price changes, not by the combined frequency of temporary and regular price changes. Since regular prices are sticky in the data, the models predict a substantial degree of aggregate price stickiness even though micro prices change frequently. In particular, the aggregate price level in our models is as sticky as in standard models in which micro prices change about once a year. In this sense, prices are sticky after all.

Subject (JEL) Stichwort Related information Date Modified
  • 11/20/2019
Corporate Author
  • Federal Reserve Bank of Minneapolis. Research Department
  • Federal Reserve Bank of Minneapolis
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