Reset Price Inflation and the Impact of Monetary Policy Shocks

Joint with: Peter J. Klenow and Benjamin A. Malin

A standard state-dependent pricing model generates little monetary non-neutrality. Two ways of generating more meaningful real effects are time-dependent pricing and strategic complementarities. These mechanisms have telltale implications for the persistence and volatility of “reset price inflation.” Reset price inflation is the rate of change of all desired prices (including goods that have not changed price in the current period). Using the micro

data underpinning the CPI, we construct an empirical measure of reset price inflation. We find that time-dependent models imply unrealistically high persistence and stability of reset price inflation, especially for goods with sticky prices. This discrepancy is only exacerbated by adding strategic complementarities, even under state-dependent pricing. A state-dependent model with no strategic complementarities aligns most closely with the data.

For more information, contact Dirk Krueger.