Price dispersion and inflation: new facts and theoretical implications
Abstract: From a macroeconomic perspective, price rigidity is often perceived to be an important source of price dispersion, with significant implications for the dynamic properties of aggregate variables, welfare calculations, and the design of optimal policy. For instance, in standard New Keynesian models, the key cost of business cycles stems from the price dispersion resulting from firms' inability to adjust prices instantaneously. However, different macroeconomic models make conflicting predictions about the level of price dispersion, as well as about its dynamic properties and sensitivity to inflation. These contrasting predictions can help us to discriminate across alternative models. This paper examines the link between price dispersion and inflation, and the role of sales in this relationship.
File format is application/pdf
Description: Full text
Provider: Federal Reserve Bank of Boston
Part of Series: Working Papers
Publication Date: 2015-07-01
Pages: 49 pages