What the study found
The study finds that, in standard new Keynesian models, the gap between measured inflation in fixed-weight price indices and true inflation becomes larger when inflation rises rapidly. The gap also increases with greater price stickiness and a higher elasticity of substitution across goods, which is a measure of how easily consumers switch between products.
Why the authors say this matters
The authors suggest this matters because inflation measures like the consumer price index may differ substantially from true price indices under some conditions. They conclude that these differences can be large and persistent for inflation increases similar to those seen in the United States after 2020.
What the researchers tested
The researchers built model-based inflation measures in time-dependent pricing models and compared them with inflation measures analogous to those used in data. They focused on a standard new Keynesian model and examined how the differences changed with inflation speed, price stickiness, and the elasticity of substitution across goods.
What worked and what didn't
The model shows larger differences between fixed-weight price indices and true price indices when inflation increases rapidly. These differences are reported to be increasing in price stickiness and in the elasticity of substitution across goods, and they are described as large and persistent for parameter values commonly used in the literature.
What to keep in mind
The abstract describes model-based results rather than a test using new data. It does not provide numerical estimates in the summary, and it does not discuss limitations beyond the model setting and parameter assumptions.
Key points
- Fixed-weight price indices and true price indices can diverge when inflation rises quickly.
- The divergence is larger when prices are stickier.
- The divergence is also larger when substitution across goods is easier.
- For commonly used parameter values, the differences are described as large and persistent.
- The abstract links the result to inflation increases similar to those seen in the U.S. after 2020.
Disclosure
- Research title:
- Inflation gaps grow in sticky-price models
- Authors:
- Lawrence J. Christiano, Martin Eichenbaum, Benjamin K. Johannsen
- Institutions:
- Federal Reserve Board of Governors, Northwestern University, Northwestern University
- Publication date:
- 2026-02-25
- OpenAlex record:
- View
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