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

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  • 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.

Suggested Citation

  • Erwan Gautier & Hervé Le Bihan, 2010. "Time-varying (S,s) band models: properties and interpretation," Working Papers hal-00526295, HAL.
    • Handle: RePEc:hal:wpaper:hal-00526295
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00526295
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    References listed on IDEAS

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    Cited by:

    1. Dhyne, Emmanuel & Fuss, Catherine & Pesaran, M. Hashem & Sevestre, Patrick, 2011. "Lumpy Price Adjustments: A Microeconometric Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(4), pages 529-540.
    2. Bo E. Honoré & Daniel Kaufmann & Sarah Lein, 2012. "Asymmetries in Price‐Setting Behavior: New Microeconometric Evidence from Switzerland," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 211-236, December.
    3. Erwan Gautier & Ronan Le Saout, 2015. "The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1063-1089, September.

    More about this item

    Keywords

    (S; s) models; adjustment costs; menu costs;

    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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