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Fair prices, sticky information, and the business cycle

Listed author(s):
  • Söderberg, Johan

    ()

    (Dept. of Economics, Stockholm University)

A fair price model in which firms are hesitant to raise their prices due to concerns about adverse consumer reactions is developed and integrated into the standard New Keynesian framework. In the model, monetary neutrality arise as a combination of a fairness constraint putting a limit on how high prices can be set over households’ projections of firms’ marginal cost, and households’ limited ability to accurately observe marginal cost. I show analytically that the model is consistent with a plethora of outcomes, ranging from complete monetary neutrality to generating substantial real effects. When plausible values are assigned to parameters and prices are strategic complements, business cycle dynamics closely resembles that in the sticky information model proposed by Mankiw and Reis (2002).

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File URL: http://www2.ne.su.se/paper/wp15_01.pdf
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Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2015:1.

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Length: 26 pages
Date of creation: 13 Jan 2015
Handle: RePEc:hhs:sunrpe:2015_0001
Contact details of provider: Postal:
Department of Economics, Stockholm, S-106 91 Stockholm, Sweden

Phone: +46 8 16 20 00
Fax: +46 8 16 14 25
Web page: http://www.ne.su.se/
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  1. 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.
  2. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
  3. Ernst Fehr & Jean-Robert Tyran, 2008. "Limited Rationality and Strategic Interaction: The Impact of the Strategic Environment on Nominal Inertia," Econometrica, Econometric Society, vol. 76(2), pages 353-394, 03.
  4. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 541-585.
  5. Woodford, Michael, 2009. "Information-constrained state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 100-124.
  6. Emi Nakamura & Jón Steinsson, 2010. "Monetary Non-neutrality in a Multisector Menu Cost Model," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 961-1013.
  7. Rotemberg, Julio J., 2005. "Customer anger at price increases, changes in the frequency of price adjustment and monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 829-852, May.
  8. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
  9. John Haltiwanger & Michael Waldman, 1989. "Limited Rationality and Strategic Complements: The Implications for Macroeconomics," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 463-483.
  10. Fabiani, Silvia & Loupias, Claire & Martins, Fernando & Sabbatini, Roberto (ed.), 2007. "Pricing Decisions in the Euro Area: How Firms Set Prices and Why," OUP Catalogue, Oxford University Press, number 9780195309287.
  11. David Amirault & Carolyn Kwan & Gordon Wilkinson, 2006. "Survey of Price-Setting Behaviour of Canadian Companies," Staff Working Papers 06-35, Bank of Canada.
  12. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
  13. Apel, Mikael & Friberg, Richard & Hallsten, Kerstin, 2005. "Microfoundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 313-338, April.
  14. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
  15. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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