On May 12, 2009, the Federal Reserve Bank of Chicago, the National Association of State Budget Officers, and the National Tax Association co-sponsored a conference to examine key issues facing state and local governments, with a focus on factors that may affect their current and future revenues.

Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our...