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Customer Anger at Price Increases, Time Variation in the Frequency of Price Changes and Monetary Policy

  • Julio J. Rotemberg

While much evidence suggests tha price rigidity is due to a concern with the reaction of customers, price increases do not seem to be typically associated with drastic reduction in purchases. To explain this apparent inconsistency, this paper develops a model where consumers care about the fairness of prices and react negatively only when they become convinced that prices are unfair. This leads to price rigidity, though the implications of the model are not identical to those of existing models of costly price adjustment. In particular, the frequency of price adjustment ought to depend on economy-wide variables observed by consumers. As I show, this has implications for the effects of monetary policy. It can, in particular, explain why inflation does not fall immediately after a monetary tightening.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9320.

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Date of creation: Nov 2002
Date of revision:
Publication status: published as Rotemberg, Julio J. "Customer Anger At Price Increases In The Frequency Of Price Adjustment And Monetary Policy," Journal of Monetary Economics, 2005, v52(4,May), 829-852.
Handle: RePEc:nbr:nberwo:9320
Note: EFG ME
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