Optimal Pricing Under Stochastic Inflation: State:Dependent (s,S) Policies
AbstractA model of firm-level optimal pricing under stochastic inflation and fixed costs of adjusting prices is solved and characterized. In this model, inflation alternates stochastically between some positive rate g and zero inflation. We find that a single (s,S) band is not optimal for the firm, as was claimed in the earlier literature. Rather, the firm will set a different (s,S) band for each state of the world, with the zero-inflation band wholly contained in the positive-inflation band. A numerical example is then presented, showing that a higher variance of aggregate price changes increases price dispersion in the positive-inflation state and decreases price dispersion in the zero-inflation state.
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Bibliographic InfoPaper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0127.
Date of creation: Nov 2001
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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html
Inflation; inflation variability; menu costs; price dispersion; state-dependent pricing;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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