TY  - JOUR
AU  - Klenow,Peter J.
AU  - Kryvtsov,Oleksiy
TI  - State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11043
PY  - 2005
Y2  - January 2005
UR  - http://www.nber.org/papers/w11043
L1  - http://www.nber.org/papers/w11043.pdf
N1  - Author contact info:
Peter J. Klenow
Department of Economics
579 Serra Mall
Stanford University
Stanford, CA  94305-6072
Tel: 650/725-8169
Fax: NA
E-Mail: Pete@Klenow.net

Oleksiy Kryvtsov
Bank of Canada
Research Department
234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
Tel: (613) 782-7818
Fax: (613) 782-7163
E-Mail: okryvtsov@bankofcanada.ca
AB  - Inflation equals the product of two terms: an extensive margin (the fraction of items with price changes) and an intensive margin (the average size of those price changes). The variance of inflation over time can be decomposed into contributions from each margin. The extensive margin figures importantly in many state-dependent pricing models, whereas the intensive margin is the sole source of inflation changes in staggered time-dependent pricing models. We use micro data collected by the U.S. Bureau of Labor Statistics to decompose the variance of consumer price inflation from 1988 through 2003. We find that around 95% of the variance of monthly inflation stems from fluctuations in the average size of price changes, i.e., the intensive margin. When we calibrate a prominent state-dependent pricing model to match this empirical variance decomposition, the model's shock responses are very close to those in time-dependent pricing models.
ER  -