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Repricing Avalanches

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  • Makoto Nirei
  • José A. Scheinkman

Abstract

We present a menu-cost pricing model with a large but finite number n of firms. A firm’s nominal price increase lowers other firms’ relative prices, thereby inducing further nominal price increases. The distribution of these “repricing avalanches” converges as n→∞ to a mixture of generalized Poisson distributions with an indexofdispersion=1/(1−θ)2, where θ is determined by the equilibrium of the continuous limit. We calibrate the model to the US experience during 1988–2005 and obtain a θ surprisingly close to unity. Our model accounts for the positive relationship between inflation level and volatility observed in the data.

Suggested Citation

  • Makoto Nirei & José A. Scheinkman, 2024. "Repricing Avalanches," Journal of Political Economy, University of Chicago Press, vol. 132(4), pages 1327-1388.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/727286
    DOI: 10.1086/727286
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