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Threshold Pricing in a Noisy World

Author

Listed:
  • Timo Henckel
  • Gordon D. Menzies
  • Daniel J. Zizzo

Abstract

We propose that the formation of beliefs be treated as statistical hypothesis tests, and label such beliefs inferential expectations. If a belief is overturned due to sufficient contrarian evidence, we assume agents switch to the rational expectation. We build a state dependent Phillips curve, and show that adjustments to equilibria may be contaminated by signal censoring, where agents in possession of extreme information are the first to adjust to changed economic circumstances. This approach is able to replicate recent micro-level evidence on firms?pricing behavior and sheds light onto the dynamics of disaggregated prices.

Suggested Citation

  • Timo Henckel & Gordon D. Menzies & Daniel J. Zizzo, 2010. "Threshold Pricing in a Noisy World," CAMA Working Papers 2010-01, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2010-01
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2021-06/01_henckel_menzies_zizzo_2010.pdf
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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