The Skewness of the Price Change Distribution: A New Touchstone for Sticky Price Models

Abstract

We present a new way of empirically evaluating various sticky price models that are used to assess the degree of monetary nonneutrality. While menu cost models uniformly predict that price change skewness and dispersion fall with inflation, in the Calvo model, both rise. However, the U.S. Consumer Price Index (CPI) data from the late 1970s onward show that skewness does not fall with inflation, while dispersion does. We present a random menu cost model that, with a menu cost distribution that has a strong Calvo flavor, can match the empirical patterns. The model exhibits much more monetary nonneutrality than existing menu cost models.