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A Kinked‐Demand Theory of Price Rigidity

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  • STÉPHANE DUPRAZ

Abstract

I provide a microfounded theory for one of the oldest, but so far informal, explanations of price rigidity: the kinked‐demand curve theory. Kinked‐demand curves arise when some customers observe at no cost only the price at the store they are at. At the microlevel, the kinked‐demand theory predicts that prices should be more likely to change if they have recently changed, and more flexible in markets where customers can more easily compare prices. At the macrolevel, it captures a part of the inflation/output trade‐off that is not shifted by inflation expectations and therefore persists in the long run.

Suggested Citation

  • Stéphane Dupraz, 2024. "A Kinked‐Demand Theory of Price Rigidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 325-363, March.
    • Handle: RePEc:wly:jmoncb:v:56:y:2024:i:2-3:p:325-363
    DOI: 10.1111/jmcb.13067
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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