Price dispersion and inflation: New facts and theoretical implications

In workhorse macroeconomic models, price dispersion is a central determinant of welfare, the cost of business cycles, optimal inflation, and the tradeoff between inflation and output stability. While price dispersion increases with inflation in the models, this relationship is negative in the data-due to sales prices. The comovement of price dispersion and inflation for regular prices is positive. A model with sales can quantitatively match the comovement in the data, whereas a range of similar models without sales cannot, even for regular prices. These findings have important implications for welfare calculations, optimal inflation, and the effects of monetary shocks. (c) 2019 Elsevier B.V. All rights reserved.