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Time-varying (S,s) band models: properties and interpretation

Author Info

  • Erwan Gautier

    ()

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - UN - Université de Nantes, BF - Banque de France - Banque de France)

  • Hervé Le Bihan

    ()

    (BF - Banque de France - Banque de France)

Abstract

A recent strand of empirical work uses (S,s) models with time-varying stochastic bands to describe infrequent adjustments of prices and other variables. The present paper examines some properties of this model, which encompasses most micro-founded adjustment rules rationalizing infrequent changes. We illustrate that this model is flexible enough to fit data characterized by infrequent adjustment and variable adjustment size. We show that, to the extent that there is variability in the size of adjustments (e.g. if both small and large price changes are observed), i) a large band parameter is needed to fit the data and ii) the average band of inaction underlying the model may differ strikingly from the typical observed size of adjustment. The paper thus provides a rationalization for a recurrent empirical result: very large estimated values for the parameters measuring the band of inaction.

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Paper provided by HAL in its series Working Papers with number hal-00526295.

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Date of creation: 14 Oct 2010
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Handle: RePEc:hal:wpaper:hal-00526295
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Keywords: (S; s) models; adjustment costs; menu costs;

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Find related papers by JEL classification:
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
  • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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  1. George J. Hall & John Rust, 1999. "An Empirical Model of Inventory Investment by Durable Commodity Intermediaries," Cowles Foundation Discussion Papers 1228, Cowles Foundation for Research in Economics, Yale University.
  2. Mikhail Golosov & Robert E. Lucas, 2003. "Menu Costs and Phillips Curves," NBER Working Papers 10187, National Bureau of Economic Research, Inc.
  3. Bev Dahlby, 1992. "Price Adjustment in an Automobile Insurance Market: A Test of the Sheshinski-Weiss Model," Canadian Journal of Economics, Canadian Economics Association, vol. 25(3), pages 564-83, August.
  4. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 359-383.
  5. Emmanuel Dhyne & Catherine Fuss & Hashem Pesaran & Patrick Sevestre, 2006. "Lumpy price adjustments : a microeconometric analysis," Working Paper Research 100, National Bank of Belgium.
  6. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  7. Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(3), pages 863-904.
  8. Jonathan L. Willis, 2000. "Estimation of adjustment costs in a model of state-dependent pricing," Research Working Paper RWP 00-07, Federal Reserve Bank of Kansas City.
  9. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
  10. Laurent Baudry & Hervé Le Bihan & Patrick Sevestre & Sylvie Tarrieu, 2007. "What do Thirteen Million Price Records have to Say about Consumer Price Rigidity?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(2), pages 139-183, 04.
  11. Fisher, Timothy C. G. & Konieczny, Jerzy D., 1995. "The relative rigidity of oligopoly pricing," Economics Letters, Elsevier, vol. 49(1), pages 33-38, July.
  12. George Hall & John Rust, 2007. "The (S,s) Policy is an Optimal Trading Strategy in a Class of Commodity Price Speculation Problems," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(3), pages 515-538, March.
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Cited by:

  1. Bo E. Honoré & Daniel Kaufmann & Sarah Marit Lein, 2012. "Asymmetries in Price-Setting Behavior: New Microeconometric Evidence from Switzerland," Working Papers 2012-09, Swiss National Bank.
  2. Emmanuel Dhyne & Catherine Fuss & M. Hashem Pesaran & Patrick Sevestre, 2007. "Lumpy Price Adjustments: A Microeconometric Analysis," CESifo Working Paper Series 2010, CESifo Group Munich.
  3. Erwan Gautier & Ronan Le Saout, 2012. "The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data," Working Papers hal-00759095, HAL.

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