Thursday, February 17, 2011

Price points, good diversity and price rigidity

Much of the real impact of monetary policy hinges on some sort of rigidity in some prices. As regular readers must have noticed, I am not convinced I am not convinced that prices a rigid to the point that it matters, and I am particularly appalled how price rigidity is introduced in theoretical models. Let us have a look at some of latest research on price rigidity.

Edward Knottek uses supermarket scanner to find that price points are much more important than menu costs in determining prices. Price points are for example prices ending in 9, which make up 60% of retail prices. He also finds that in all but 10% of cases, prices return to the previous level after a sale. These two facts cannot be reconciled with menu costs being of relevance. Yet menu costs are the foundation, explicitly or implicitly of almost all models of price rigidity.

Saroj Bhattarai and Raphael Schoenle use producer prices and establish interesting patterns in decisions to change prices. They find that firms with a large variety of goods change prices more frequently, but by smaller amounts. If they change a price, they are more likely to decrease it, and the variance of positive price changes is larger. They also find that for a model to replicate such facts, one needs firm-specific menu costs and state-dependent pricing. This is definitely not Calvo pricing.

1 comment:

Anonymous said...

If you are "not convinced that prices are rigid to the point that it matters", then how do you think that the Fed can affect real interest rates over the medium term? (i.e. a year or two)? Or do you not think that the Fed actually affects interest rates except in the very short run?

If you do think that the Fed had economically significant influence over real interest rates, what is your proposed mechanism (if not sticky prices)?