Description:

Luminita Stevens (Maryland): Price Rigidities in U.S. Business Cycles 

Abstract: We provide a structurally estimated time series for the degree of nominal price rigidities in the United States between 1978 and 2023. To model the price rigidity, we allow for stochastic state dependence in both the timing of price changes and the choice of what price to charge. We give a cost-based micro-foundation to this stochasticity, modeling firms that face information costs and menu costs when making decisions regarding their prices. Estimating the model on time series of moments from the distribution of price changes over time-–in addition to time series of real economic activity and inflation-–we find considerable monetary non-neutrality with medium-cycle volatility. Underlying our estimated series are results that shed new light on the sources and dynamics of price rigidity. In particular, the model attributes most of the rigidities in price setting not to infrequent, but rather to inaccurate price adjustment. The timing of adjustments has been accurate, especially for price decreases. Menu costs have been small, while information frictions are large and volatile. This volatility has implications for the trade-offs involved in monetary stabilization policy.