DISAGGREGATE EVIDENCE ON PRICE STICKINESS AND IMPLICATIONS FOR MACRO MODELS

I. INTRODUCTION Fashions that take hold of the field of macroeconomics share important characteristics with the economy its practitioners seek to understand: approaches that are in vogue exhibit cycles with varying frequencies and amplitudes. During the 1960s, theories based on assumptions of widespread wage and price stickiness dominated the landscape. The new classical macroeconomics that emerged in the 1970s challenged the preeminence of these Keynesian theories, and by the mid-1980s, real-business cycle theories assuming widespread price flexibility received a considerable portion of macroeconomists' attention. Beginning in the early 1990s, as reviewed by Gordon (1990), Mankiw (1990), and Mankiw and Romer (1991a, 1991b), a Keynesian counterrevolution occurred, and by the conclusion of the 1990s, sticky-price theories had regained much of their luster. Today, as discussed by Woodford (2003), price stickiness is a fundamental building block of numerous theories aimed at explaining both movements in domestic variables, such as employment and real output, and changes in international variables, such as the trade balance and the current account. There has, as we discuss below, been empirical work seeking to determine whether real-world data might be consistent with the implications of macroeconomic theories with inflexible product prices. There has been very little work, however, to determine whether the most influential approaches to testing the reasonableness of micro-based models of price stickiness support the underlying assumption of widespread price rigidities at the micro level. Instead, leading studies in the literature examine only aggregate data. We find this quite surprising given that so many modern macroeconomic models consider economies populated with representative producers that establish an array of product prices that are fixed in the short run, which in most models is commonly taken to be the current period of analysis. Are most product prices really sticky? Bils and Klenow (2004) have addressed this question by studying the frequency of price adjustments for 123 categories of consumer goods and services. Their answer is that most prices in fact change relatively frequently, with about half of prices changing roughly every 4 or 5 too. Although they found that the prices of certain services and what they call "processed" physical goods adjust more slowly, their overall results offer relatively little support for sticky-price models. In this paper, we also examine microeconomic data for the United States. In contrast to Bils and Klenow, however, we examine industry-level data on firm prices and costs. We employ the empirical methodology proposed by the highly influential study by Gali and Gertler (1999), which in turn is based on the micro-based analysis of imperfect competition and price stickiness proposed by Calvo (1983). Nevertheless, our conclusions are broadly similar to those of Bils and Klenow. Overall, we find that across the industries to which we are able to apply the Gali-Gertler-style approach, no more than 43% of total sales are generated by industries with estimated periods of price adjustment of 6 quarters or more. This percentage drops to below 23% when the discount factor is restricted to reasonable values, and under these restrictions, industries accounting for at least 36% of all sales in the industries we analyze have estimated price adjustment intervals of less than 2 quarters. In all empirical approaches we consider, unrestricted analyses producing estimates of industry-specific discount factors, at least 44% of total sales of the industries we consider are generated by industries with estimated price adjustment speeds of less than 1 yr. Furthermore, in most specifications, the unweighted average price adjustment interval for all industries is below 1 yr, and the weighted average--using industry shares of total sales as weights--price adjustment interval for all specifications ranges from no higher than 3. …