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Precautionary price stickiness

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  • James Costain

    ()
    (Banco de España)

  • Anton Nakov

    ()
    (Banco de España)

Abstract

This paper proposes two models in which price stickiness arises endogenously even though fi rms are free to change their prices at zero physical cost. Firms are subject to idiosyncratic and aggregate shocks, and they also face a risk of making errors when they set their prices. In our fi rst specifi cation, fi rms are assumed to play a dynamic logit equilibrium, which implies that big mistakes are less likely than small ones. The second specifi cation derives logit behavior from an assumption that precision is costly. The empirical implications of the two versions of our model are very similar. Since fi rms making suffi ciently large errors choose to adjust, both versions generate a strong “selection effect” in response to a nominal shock that eliminates most of the monetary nonneutrality found in the Calvo model. Thus the model implies that money shocks have little impact on the real economy, as in Golosov and Lucas (2007), but fi ts microdata better than their specifi cation.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/11/Fich/dt1122e.pdf
File Function: First version, September 2011
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1122.

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Length: 44 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:bde:wpaper:1122

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Related research

Keywords: Nominal rigidity; logit equilibrium; state-dependent pricing; (S; s) adjustment; near-rational behavior;

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References

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  1. Bartosz Mackowiak & Mirko Wiederholt, 2008. "Business Cycle Dynamics under Rational Inattention," 2008 Meeting Papers 1059, Society for Economic Dynamics.
  2. Alisdair McKay & Filip Matejka, 2011. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," Boston University - Department of Economics - Working Papers Series WP2011-026, Boston University - Department of Economics.
  3. James Costain & Antón Nákov, 2008. "Price adjustments in a general model of state-dependent pricing," Banco de Espa�a Working Papers 0824, Banco de Espa�a.
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  7. Filip Matejka, 2010. "Rationally Inattentive Seller: Sales and Discrete Pricing," 2010 Meeting Papers 420, Society for Economic Dynamics.
  8. Robert Lucas & Mike Golosov, 2004. "Menu Costs and Phillips Curves," 2004 Meeting Papers 144, Society for Economic Dynamics.
  9. Kevin D. Sheedy, 2007. "Inflation Persistence When Price Stickiness Differs Between Industries," CEP Discussion Papers dp0838, Centre for Economic Performance, LSE.
  10. Kevin D. Sheedy, 2007. "Intrinsic Inflation Persistence," CEP Discussion Papers dp0837, Centre for Economic Performance, LSE.
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  16. Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," NBER Working Papers 11043, National Bureau of Economic Research, Inc.
  17. Mattsson, Lars-Goran & Weibull, Jorgen W., 2002. "Probabilistic choice and procedurally bounded rationality," Games and Economic Behavior, Elsevier, vol. 41(1), pages 61-78, October.
  18. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November.
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  22. Marsili, Matteo, 1999. "On the multinomial logit model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 269(1), pages 9-15.
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  24. Carvalho Carlos, 2006. "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-58, December.
  25. Philip A. Haile & Ali Hortaçsu & Grigory Kosenok, 2004. "On the Empirical Content of Quantal Response Models," Levine's Bibliography 122247000000000218, UCLA Department of Economics.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Precautionary price stickiness
    by Christian Zimmermann in NEP-DGE blog on 2011-09-08 03:03:46
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Cited by:
  1. Bo E. Honoré & Daniel Kaufmann & Sarah Lein, 2012. "Asymmetries in Price‐Setting Behavior: New Microeconometric Evidence from Switzerland," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 211-236, December.

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