What the study found
The study found that, in a standard New Keynesian model, measured inflation in fixed-weight price indices can differ substantially from true price indices when inflation rises rapidly. The differences become larger as prices become stickier and as the elasticity of substitution across goods increases.
Why the authors say this matters
The authors conclude that model-based comparisons help show how inflation measures like the consumer price index can diverge from true price indices. They also indicate that these differences were large and persistent for inflation increases of the size seen in the United States after 2020.
What the researchers tested
The researchers constructed model-based inflation measures in time-dependent pricing models and compared them with inflation measures analogous to those used in the data, such as the consumer price index. They focused on the standard New Keynesian model and examined how the results changed with price stickiness and the elasticity of substitution across goods.
What worked and what didn't
The comparisons showed that fixed-weight price indices and true price indices can move apart when inflation rises quickly. For commonly used parameter values, the abstract says these differences are large and persistent for inflation increases similar to those after 2020 in the United States.
What to keep in mind
The abstract describes results from a model-based analysis, not a direct empirical test. It does not give detailed limitations beyond the model setting and the specific parameter values discussed.
Key points
- The paper compares measured inflation in fixed-weight price indices with inflation in true price indices.
- In the standard New Keynesian model, faster inflation increases the gap between the two measures.
- The gap grows with greater price stickiness and a higher elasticity of substitution across goods.
- For commonly used parameter values, the differences are described as large and persistent.
- The abstract links the size of these differences to inflation increases seen in the United States after 2020.
Disclosure
- Research title:
- Inflation gaps widen in sticky-price models during rapid inflation
- 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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