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Price Adjustments in a General Model of State‐Dependent Pricing
Author(s) -
COSTAIN JAMES,
NAKOV ANTON
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2010.00378.x
Subject(s) - microdata (statistics) , econometrics , economics , inflation (cosmology) , variance (accounting) , price setting , price level , phillips curve , distribution (mathematics) , mathematics , monetary policy , monetary economics , microeconomics , physics , population , demography , accounting , sociology , theoretical physics , census , mathematical analysis
We study the distribution of retail price adjustments under the assumption that firms are more likely to adjust their prices when doing so is more valuable. Our setup nests Calvo (1983) at one extreme and a fixed menu cost model at the other; all parameterizations are ranked by a measure of state dependence. High state dependence implies, counterfactually, that there are no small price changes and that the variance of price changes falls sharply with trend inflation. The parameterization that best fits microdata has low state dependence, implying a Phillips curve coefficient 60% as large as that of the Calvo model, but is nonetheless well behaved at high inflation rates.