Skip to content Skip to navigation

State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?

Jul 2007
Working Paper
By  Pete Klenow, Oleksiy Kryvtsov
In the 1988-2004 micro data collected by the U.S. Bureau of Labor Statistics for the CPI, price changes are frequent (every 4-7 months, depending on the treatment of sale prices) and large in absolute value (on the order of 10%). The size and timing of price changes varies considerably for a given item, but the size and probability of a price change are unrelated to the time since the last price change. Movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price, due to offsetting movements in the fraction of price increases and decreases. Neither leading time-dependent models (Taylor or Calvo) nor 1st generation state-dependent models match all of these facts. Some 2nd generation state-dependent models, however, appear broadly consistent with the empirical patterns.