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Asymmetric Price Adjustment: Micro-foundations and Macroeconomic Implications

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V. Bhaskar ()

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Abstract

We present a simple menu cost model which explains the finding that firms are more likely to adjust prices upward than downward. Asymmetric adjustment to shocks arises naturally, even without trend inflation, from the desire of firms to keep industry prices as high as is sustainable and the non-convexity due to menu costs. It implies that aggregate demand shocks have asymmetric effects - negative shocks are reduce output, whereas positive shocks are inflationary. We examine the implications of asymmetric adjustment for equilibrium output and the optimal inflation rate.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 547.

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Date of creation: 27 Sep 2002
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Handle: RePEc:esx:essedp:547

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Victoria Dobrynskaya, 2007. "The Optimal Monetary Policy Under Incomplete Pass-Through And Asymmetric Price Rigidity," Working Papers WP13_2007_04, Laboratory for Macroeconomic Analysis. [Downloadable!]
  2. Babutsidze, Zakaria, 2006. "(S,s) Pricing: Does the Heterogeneity Wipe Out the Asymmetry on Micro Level?," UNU-MERIT Working Paper Series 033, United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology. [Downloadable!]
  3. Pierpaolo Benigno & Luca Antonio Ricci, 2008. "The Inflation-Unemployment Trade-Off at Low Inflation," NBER Working Papers 13986, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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