Sticky-Price Model

Evidence and data

Use price-duration microdata, inflation persistence, sectoral price changes, nominal-spending shocks, and output responses.

Calibration or measurement

The sticky share, desired-price sensitivity, and demand specification define the short-run real effect.

Boundaries

• Menu costs, information frictions, and contracts are distinct mechanisms.
• Sectoral heterogeneity can dominate the aggregate average.
• Long-run monetary neutrality still holds in the basic setup.

Use guidance

When sufficient

Short-run real effects of nominal demand disturbances when a well-calibrated fraction of firms cannot reset prices within the period. The model supports the core monetary non-neutrality result: if 80 percent of firms are stuck at old prices, a monetary expansion raises real output in the short run. Price-duration microdata from scanner datasets and CPI micro files provide direct evidence on the calibrated sticky share (Calvo 1983 JME; Taylor 1980 JPE).

When sketch only

Do not use for long-run analysis, where money is neutral and the sticky fraction is irrelevant. Do not apply to industries or episodes where prices adjust daily or weekly, such as commodity markets, online retail, or high-inflation regimes: the calibrated Calvo parameter does not hold across sectors with very different adjustment frequencies.

When to switch

Switch to a menu-cost model (Golosov and Lucas 2007 JPE) when the extensive margin of price changes, which firms reset and by how much, is the object of interest rather than the average frequency. Switch to a sticky-information model (Mankiw and Reis 2002 QJE) when the data suggest the constraint is information updating rather than physical price adjustment.

Falsification signal

A large nominal shock that produces real effects lasting less than one or two quarters in an industry whose average price duration is calibrated at four to six quarters contradicts the sticky-price mechanism. If most prices in the dataset reset within the quarter following a significant monetary shock, the Calvo parameter implied by the data is too high to generate the observed real persistence.