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Distributional dynamics under smoothly state-dependent pricing

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  • Costain, James
  • Nakov, Anton

Abstract

Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into “intensive”, “extensive”, and “selection” margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to sector-specific shocks is gradual, but inappropriate econometrics might make it appear immediate.

Suggested Citation

  • Costain, James & Nakov, Anton, 2011. "Distributional dynamics under smoothly state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 646-665.
  • Handle: RePEc:eee:moneco:v:58:y:2011:i:6:p:646-665 DOI: 10.1016/j.jmoneco.2011.11.006
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    Citations

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    Cited by:

    1. Etienne Gagnon & David López-Salido & Nicholas Vincent, 2012. "Individual price adjustment along the extensive margin," International Finance Discussion Papers 1052, Board of Governors of the Federal Reserve System (U.S.).
    2. Etienne Gagnon & David López-Salido & Nicolas Vincent, 2013. "Individual Price Adjustment along the Extensive Margin," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 235-281.
    3. Mina Kim, & Deokwoo Nam, & Jian Wang & Jason Wu,, 2013. "International Trade Price Stickiness and Exchange Rate Pass-through in Micro Data: A Case Study on US-China Trade," Working Papers 467, U.S. Bureau of Labor Statistics.
    4. Jaccard Ivan, 2011. "Asset Pricing and Housing Supply in a Production Economy," The B.E. Journal of Macroeconomics, De Gruyter, pages 1-40.
    5. Jacopo Magnani & Aspen Gorry & Ryan Oprea, 2016. "Time and State Dependence in an Ss Decision Experiment," American Economic Journal: Macroeconomics, American Economic Association, pages 285-310.
    6. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2017. "A theory of price adjustment under loss aversion," Journal of Economic Behavior & Organization, Elsevier, pages 78-95.
    7. Adam Reiff & Peter Karadi, 2014. "Menu Costs, Aggregate Fluctuations and Large Shocks," 2014 Meeting Papers 914, Society for Economic Dynamics.
    8. Guenter W. Beck & Kirstin Hubrich & Massimiliano Marcellino, 2016. "On the Importance of Sectoral and Regional Shocks for Price‐Setting," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1234-1253, November.
    9. Costain, James & Nakov, Anton, 2015. "Precautionary price stickiness," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 218-234.
    10. Costain, James & Nakov, Anton, 2011. "Distributional dynamics under smoothly state-dependent pricing," Journal of Monetary Economics, Elsevier, pages 646-665.
    11. Robert G. King & Alexander Wolman & Michael Dotsey, 2009. "Inflation and Real Activity with Firm Level Productivity Shocks," 2009 Meeting Papers 367, Society for Economic Dynamics.
    12. Ahrens, Steffen & Hartmann, Matthias, 2014. "State-dependence vs. timedependence: An empirical multi-country investigation of price sluggishness," Kiel Working Papers 1907, Kiel Institute for the World Economy (IfW).
    13. Alberto Cavallo, 2015. "Scraped Data and Sticky Prices," NBER Working Papers 21490, National Bureau of Economic Research, Inc.
    14. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, pages 679-739.
    15. James Costain & Anton Nakov, 2011. "Price Adjustments in a General Model of State‐Dependent Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 385-406, March.
    16. Costain, James & Nakov, Anton, 2011. "Distributional dynamics under smoothly state-dependent pricing," Journal of Monetary Economics, Elsevier, pages 646-665.
    17. Tamim Bayoumi & Hui Tong & Shang-Jin Wei, 2012. "The Chinese Corporate Savings Puzzle: A Firm-level Cross-Country Perspective," NBER Chapters,in: Capitalizing China, pages 283-308 National Bureau of Economic Research, Inc.
    18. Adam Reiff & Peter Karadi, 2011. "Large Shocks in Menu Cost Models," 2011 Meeting Papers 884, Society for Economic Dynamics.
    19. Yuriy Gorodnichenko & Viacheslav Sheremirov & Oleksandr Talavera, 2014. "Price Setting in Online Markets: Does IT Click?," NBER Working Papers 20819, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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