DP6709 Reference Prices and Nominal Rigidities

Author(s): Martin Eichenbaum , Nir Jaimovich , Sérgio Rebelo

Publication Date: February 2008

Keyword(s): markups , nominal cost inertia , nominal price inertia

JEL(s): E30

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP6709.asp.asp

We assess the importance of nominal rigidities using a new weekly scanner data set from a major U.S. retailer, that contains information on prices, quantities, and costs for over 1,000 stores. We find that nominal rigidities are important but do not take the form of sticky prices. Instead, nominal rigidities take the form of inertia in reference prices and costs, defined as the most common prices and costs within a given quarter. Weekly prices and costs fluctuate around reference values which tend to remain constant over extended periods of time. Reference prices are particularly inertial and have an average duration of roughly one year. So, nominal rigidities are present in our data, even though weekly prices change very frequently, roughly once every two weeks. We argue that the retailer chooses the frequency with which it resets references prices so as to keep the realized markups within plus/minus twenty percent of the desired markup over reference cost.