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Price Adjustments in a General Model of State‐Dependent Pricing

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  • JAMES COSTAIN
  • ANTON NAKOV

Abstract

We study the distribution of retail price adjustments under the assumption that firms are more likely to adjust their prices when doing so is more valuable. Our setup nests Calvo (1983) at one extreme and a fixed menu cost model at the other; all parameterizations are ranked by a measure of state dependence. High state dependence implies, counterfactually, that there are no small price changes and that the variance of price changes falls sharply with trend inflation. The parameterization that best fits microdata has low state dependence, implying a Phillips curve coefficient 60% as large as that of the Calvo model, but is nonetheless well behaved at high inflation rates.

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  • 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(2‐3), pages 385-406, March.
    • Handle: RePEc:wly:jmoncb:v:43:y:2011:i:2-3:p:385-406
    DOI: 10.1111/j.1538-4616.2010.00378.x
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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