IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

State Dependent Pricing and Business Cycle Asymmetries

  • Henry Siu
  • Michael B. Devereux

We present a tractable model of state-dependent pricing and study the incentive for firms to adjust their price in response to shocks. We find a distinct asymmetry in this response. Positive shocks generate greater price flexibility (and smaller output effects) than negative shocks of the same magnitude. This asymmetry arises due to a strategic linkage between firms in the incentive to adjust prices. With a positive marginal cost shock, prices are strategic complements: firms have more incentive to increase their price when other firms increase theirs. But for a negative shock, prices are strategic substitutes: firms have less incentive to lower prices when other firms lower theirs. We analyze this asymmetry in the context of a simple dynamic macro model, and examine the response of aggregate prices and quantities to monetary policy shocks. We stress two results of this exercise. First, for empirically relevant shocks there is a substantial difference between state-dependent and time-dependent pricing. Second, our state-dependent pricing model can account for business cycle asymmetries of the magnitude that have been found empirically

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.econ.ubc.ca/siu/research/sdpbca0905.pdf
Our checks indicate that this address may not be valid because: 404 Not Found (http://www.econ.ubc.ca/siu/research/sdpbca0905.pdf [301 Moved Permanently]--> http://papers.economics.ubc.ca/legacypapers/sdpbca0905.pdf). If this is indeed the case, please notify (Christian Zimmermann)


File Function: main text
Download Restriction: no

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 161.

as
in new window

Length:
Date of creation: 2004
Date of revision:
Handle: RePEc:red:sed004:161
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Web page: http://www.EconomicDynamics.org/society.htm
Email:


More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is featured on the following reading lists or Wikipedia pages:

  1. Canadian Macro Study Group

When requesting a correction, please mention this item's handle: RePEc:red:sed004:161. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.