Real Rigidities Strike Back : Retailers, Sticky Basket Prices, and Monetary Non-neutrality

This paper demonstrates that retail-level real rigidity is both quantitatively important and consistent with facts on retail pricing. Rich retailer scanner data from NielsenIQ reveals that 1) product demand is lower when prices for other goods in the same store are higher and 2) overall store-level prices have low volatility from month to month. To account for these facts, this paper constructs a menu cost model in which demand occurs at the store-basket level and stores face incentives to keep their overall “basket prices” near those of competitors. Calibrating the price concavity of store-level demand to basket price volatility in the NielsenIQ data, the model predicts full price-level adjustment takes two and a half times as long as in a counterfactual CES model following a small monetary policy shock. Critically, retailer-level real rigidity is compatible with high volatility of item-level prices, a fact shown to be incompatible with item-level real rigidity by Klenow and Willis