2006-22 | November 2009
More Working Papers
The Frequency of Price Adjustment Viewed Through the Lens of Aggregate Data
The Calvo pricing model that lies at the heart of many New Keynesian business cycle models has been roundly criticized for being inconsistent both with time series data on inflation and with micro-data on the frequency of price changes. In this paper I develop a new pricing model whose structure can be interpreted in terms of menu costs and information gathering/processing costs, that usefully recognizes both criticisms. The resulting Phillips curve encompasses the partial-indexation model, the full-indexation model, and the Calvo model, and can speak to micro-data in ways that these models cannot. Taking the Phillips curve to the data, I find that the share of firms that change prices each quarter is about 60 percent and, perhaps reflecting the importance of information gathering/processing costs, that price indexation is important for inflation dynamics.
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