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Incomplete Price Adjustment and Inflation Persistence
Author(s) -
CHAUVET MARCELLE,
KIM INSU
Publication year - 2021
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/jmcb.12813
Subject(s) - economics , inflation (cosmology) , price setting , persistence (discontinuity) , matching (statistics) , monetary economics , price level , limit (mathematics) , monetary policy , econometrics , macroeconomics , microeconomics , mathematical analysis , statistics , physics , geotechnical engineering , mathematics , theoretical physics , engineering
This paper proposes a sticky inflation model in which inflation persistence is endogenously generated from the optimizing behavior of forward‐looking firms. Although firms change prices periodically, their ability to fully adjust them in response to changes in economic conditions is assumed to be constrained due to the presence of managerial and customer costs of price adjustment. Our findings strongly support both sources of price stickiness in the U.S. data. The model performs well in matching microeconomic evidence on price setting, particularly regarding the size and frequency of price changes. The paper also shows how incomplete price adjustments in a staggered price contracts model limit the contribution of expectations to inflation dynamics: it generates the delayed response of inflation to demand and monetary shocks.