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Fair prices, sticky information, and the business cycle

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  • Söderberg, Johan

    () (Dept. of Economics, Stockholm University)

Abstract

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).

Suggested Citation

  • Söderberg, Johan, 2015. "Fair prices, sticky information, and the business cycle," Research Papers in Economics 2015:1, Stockholm University, Department of Economics.
  • Handle: RePEc:hhs:sunrpe:2015_0001
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    References listed on IDEAS

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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.
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    3. 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.
    4. 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.
    5. David Amirault & Carolyn Kwan & Gordon Wilkinson, 2006. "Survey of Price-Setting Behaviour of Canadian Companies," Staff Working Papers 06-35, Bank of Canada.
    6. 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, March.
    7. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
    8. Woodford, Michael, 2009. "Information-constrained state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 100-124.
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    12. 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.
    13. 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.
    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.
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    More about this item

    Keywords

    Price Setting; Fairness Concerns; Sticky Information; Monetary Non-Neutrality;

    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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