DP14303 Price elasticities and demand-side real rigidities in micro data and in macro models

Author(s):	Günter Beck, Sarah Lein
Publication Date:	January 2020
Keyword(s):	Demand curve, monetary non-neutrality, Price elasticity, Price Setting, Real rigidities, super-elasticity
JEL(s):	C3, D12, E30, E31, E50
Programme Areas:	Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=14303

High degrees of demand-side real rigidities are able to generate the large monetary non-neutrality found in aggregate data. This paper provides micro-based evidence on the key parameters governing this rigidity using European homescan data. We find strong evidence for demand-side real rigidity, which is, however, significantly lower than that normally assumed in macro models. In a menu-cost model calibrated to our estimates, we show that our estimates are associated with reasonable values for production-side parameters, but they are not able to generate the degree of monetary non-neutrality observed in macro data.