Press release - Working Paper 132
Searching for additional sources of inflation persistence: the micro-price panel data approach
It is often argued that the baseline New-Keynesian model, which relies solely on the notion of infrequent price adjustment, cannot account for the observed degree of inflation sluggishness. Therefore it is common practice among macro modellers to introduce an ad hoc additional source of persistence to their models. Yet, the empirical validity of this practice has never been formally tested. This paper attempts to examine whether there is some additional persistence present in the data on micro prices, beyond that implied by infrequent price adjustment. We consider two distinct sets of assumptions consistent with the existence of an intrinsic or extrinsic source of sluggishness and build and estimate two alternative models based on these assumptions. In the case of certain product categories, particularly food, it is shown that there is evidence of less sluggishness than may be implied by the standard assumptions underlying the New-Keynesian model. We find some support for the existence of an additional source of sluggishness for some industrial goods and services. Importantly, however, the results are sensitive to the choice of model. We conclude that some inconsistencies with the baseline New-Keynesian assumptions may be tracked in the price behaviour. Yet, it is too early to assess their strength or the effect on macro aggregates. Therefore, at the current stage, it would be premature to discard the baseline version of the New-Keynesian model based on evidence from micro data. Similarly, the micro support for introducing an extra source of inflation sluggishness to macro models is still relatively weak.