Editing Nominal rigidity (section)

==Evidence==

There is now a considerable amount of evidence about how long price-spells last, and it suggests that there is a considerable degree of nominal price rigidity in the "complete sense" of prices remaining unchanged.{{cn|date=May 2024}} A price-spell is a duration during which the nominal price of a particular item remains unchanged.  For some items, such as gasoline or tomatoes,  prices are observed to vary frequently resulting in many short price spells.  For other items, such as the cost of a bottle of [[champagne]] or the cost of a meal in a restaurant, the price might remain fixed for an extended period of time (many months or even years). One of the richest sources of information about this is the price-quote data used to construct the [[Consumer Price Index]] (CPI). The statistical agencies in many countries collect tens of thousands of price-quotes for specific items each month in order to construct the CPI. In the early years of the 21st century, there were several major studies of nominal price rigidity in the US and Europe using the CPI price quote microdata. The following table gives nominal rigidity as reflected in the frequency of prices changing on average per month in several countries. For example, in France and the UK, each month on average, 19% of prices change (81% are unchanged), which implies that an average price spell lasts about 5.3 months (the expected duration of a price spell is equal to the reciprocal of the frequency of price change if we interpret the empirical frequency as representing the [[Bernoulli distribution|Bernoulli]] probability of price change generating a [[negative binomial distribution]] of durations of price-spells).

{| class="wikitable"
!bgcolor=ececec|Country (CPI data)
!bgcolor=ececec|Frequency (per month)
!bgcolor=ececec|Mean Price Spell duration (months)
!bgcolor=ececec|Data Period
|-
|US<ref name="KlenowKryvtsov2008" /> 
|{{center|27%}}
|{{center|3.7}}
|1998–2005
|-
|UK<ref name="Bunn" /><ref>{{cite journal | doi = 10.1111/obes.12173 | volume=79 | issue=6 | title=What We can Learn About the Behaviour of Firms from the Average Monthly Frequency of Price-Changes: An Application to the UK CPI Data | year=2017 | journal=Oxford Bulletin of Economics and Statistics | pages=907–932 | last1 = Dixon | first1 = Huw David | last2 = Tian | first2 = Kun| s2cid=13777820 | url=http://orca.cf.ac.uk/96509/1/DixonTinaOBES.pdf }}</ref>
|{{center|19%}}
|{{center|5.3}}
|1996–2007
|-
|Eurozone<ref name="Dhyne" />
|{{center|15%}}
|{{center|6.6}}
|Various, covering 1989–2004
|-
|Germany<ref>Hoffmann, J. and J.-R. Kurz-Kim (2006). 'Consumer Price Adjustment under the Microscope: Germany in a Period of Low Inflation', European Central Bank Working Paper Series Number 652.</ref>
|{{center|10%}}
|{{center|10}}
|1998–2004
|-
|Italy<ref>Veronese, G., S. Fabiani, A. Gattulli and R. Sabbatini (2005). 'Consumer Price Behaviour in Italy: Evidence from Micro CPI Data', European Central Bank Working Paper Series Number 449.</ref>
|{{center|9%}}
|{{center|11.1}}
|1996–2003
|-
|France<ref>{{cite journal |first1=L |last1=Baudry |first2=H |last2= Le Bihan |first3=S |last3=Tarrieu |title=Integrating Sticky Prices and Sticky Information |journal=[[Oxford Bulletin of Economics and Statistics]] |year=2007 |volume=69 |issue=2 |pages=139–183 |doi=10.1111/j.1468-0084.2007.00473.x|citeseerx=10.1.1.490.6806 |s2cid=153425669 }}</ref>
|{{center|19%}}
|{{center|5.3}}
|1994–2003
|-
|Switzerland<ref>Rudolf, B. and P. Seiler (2022). 'Price Setting Before and During the Pandemic: Evidence from Swiss Consumer Prices', European Central Bank Working Paper Series Number 2748.</ref>
|{{center|27%}}
|{{center|3.7}}
|2008–2020
|}

The fact that price spells last on average for 3.7 months does not mean that prices are not sticky. That is because many price changes are temporary (for example sales) and prices revert to their usual or "reference price".<ref name="Kehoe" >{{cite journal |first1=Patrick |last1=Kehoe |first2=  Virgiliu |last2= Midrigan |title=Prices are sticky after all |journal=[[Journal of Monetary Economics]] |year=2016 |volume=75 |issue=September |pages= 35–53 |doi=10.1016/j.jmoneco.2014.12.004 |doi-access=free }}</ref> Removing sales and temporary price cuts raises the average length of price-spells considerably: in the US it more than doubled the mean spell duration to 11 months.<ref>{{cite journal |first1=Eli |last1=Nakamura |first2=Jon |last2=Steinsson |title=Five facts about prices: a reevaluation of menu cost models |journal=[[Quarterly Journal of Economics]] |year=2008 |volume=124 |issue= 4|pages=1415–1464 |doi= 10.1162/qjec.2008.123.4.1415|citeseerx=10.1.1.177.6906 }}</ref> The reference price can remain unchanged for an average of 14.5 months in the US data.<ref name="Kehoe" /> 
Also, it is prices that we are interested in. If the price of tomatoes changes every month, the tomatoes price will generate 12 price spells in a year.  Another price that is just as important (for example, canned tomatoes) might only change once per year (one price spell of 12 months).  Looking at these two goods prices alone, we observe that there are 13 price spells with an average duration of (12+13)/13 equals about 2 months.  However, if we average across the two items (tomatoes and canned tomatoes), we see that the average spell is 6.5 months (12+1)/2. The distribution of price spell durations and its mean are heavily influenced by prices generating short price spells. If we are looking at nominal rigidity in an economy, we are more interested in the distribution of durations across prices rather than the distribution of price spell durations in itself.<ref>{{cite journal |first1=Eyal  |last1=Baharad |first2= Benjamin |last2= Eden |title=Price rigidity and price dispersion: evidence from micro data|journal=[[Review of Economic Dynamics]] |year=2004 |volume=7 |issue=3 |pages=  613–641|doi=10.1016/j.red.2004.01.004|url=http://www.accessecon.com/pubs/VUECON/vu03-w21.pdf |hdl=1803/15745 |hdl-access=free }}</ref> There is thus considerable evidence that prices are sticky in the "complete" sense, that the prices remain on average unchanged for a prolonged period of time (around 12 months). Partial nominal rigidity is less easy to measure, since it is difficult to distinguish whether a price that changes is changing less than it would if it were perfectly flexible.

Linking micro data of prices and cost, Carlsson and Nordström Skans (2012), showed that firms consider both current and future expected cost when setting prices.<ref>{{Cite journal|last1=Carlsson|first1=Mikael|last2=Nordström Skans|first2=Oskar|date=2012|title=Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm-Level Data on Product Prices and Unit Labor Cost|journal=American Economic Review|language=en|volume=102|issue=4|pages=1571–1595|doi=10.1257/aer.102.4.1571|issn=0002-8282|hdl=10419/45714|s2cid=42182289|url=http://www.riksbank.se/upload/Dokument_riksbank/Kat_publicerat/WorkingPapers/2009/wp231.pdf}}</ref> The finding that the expectation of future conditions matter for the price set today provides strong evidence in favor of nominal rigidity and the forward looking behavior of the price setters implied by the models of sticky prices outlined below.