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American Economic Review: Vol. 101 No. 1 (February 2011)

AER Volume. 101, Issue 1 | Previous ArticleNext Article

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Reference Prices, Costs, and Nominal Rigidities

Article Citation

Eichenbaum, Martin, Nir Jaimovich, and Sergio Rebelo. 2011. "Reference Prices, Costs, and Nominal Rigidities." American Economic Review, 101(1): 234-62.

DOI: 10.1257/aer.101.1.234

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. (JEL L11, L25, L81)

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Authors

Eichenbaum, Martin (Northwestern U)
Jaimovich, Nir (Stanford U)
Rebelo, Sergio (Northwestern U)

JEL Classifications

L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L25: Firm Performance: Size, Diversification, and Scope
L81: Retail and Wholesale Trade; e-Commerce