In Search of Real Rigidities

Gita Gopinath, Oleg Itskhoki

NBER Working Paper No. 16065
Issued in June 2010
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, Monetary Economics

The closed and open economy literatures work on evaluating the role of real rigidities, but in parallel. This paper brings the two literatures together. We use international price data and exchange rate shocks to evaluate the importance of real rigidities in price setting. We show that consistent with the presence of real rigidities the response of reset-price inflation to exchange rate shocks depicts significant persistence. Individual import prices, conditional on changing, respond to exchange rate shocks prior to the last price change. At the same time aggregate reset-price inflation for imports, like that for consumer prices, depicts little persistence. Competitor prices affect firm pricing, and exchange rate pass-through into import prices is greater in response to trade-weighted as opposed to bilateral exchange rate shocks. We quantitatively evaluate sticky price models (Calvo and menu cost) with variable markups at the wholesale level and constant markups at the retail level, consistent with empirical evidence. Variable markups alone generate price sluggishness at the aggregate level, while they fall short of matching price persistence at the micro level. Finally, variable markups magnify the size of the contract multiplier, but their absolute effects are modest unless they are coupled with exogenous sources of persistence.

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Document Object Identifier (DOI): 10.3386/w16065

Published: In Search of Real Rigidities, Gita Gopinath, Oleg Itskhoki. in NBER Macroeconomics Annual 2010, Volume 25, Acemoglu and Woodford. 2011

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