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Price setting frequency and the Phillips Curve

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  • Gasteiger, Emanuel
  • Grimaud, Alex

Abstract

We develop a New Keynesian (NK) model with endogenous price setting frequency. Whether a firm updates its price in a given period depends on an analysis of expected cost and benefits modelled by a discrete choice process. A firm decides to update the price when expected benefits outweigh expected cost and then resets the price optimally. As markups are countercyclical, the model predicts that prices are more flexible during expansions and less flexible during recessions. Our quantitative analysis shows that contrary to the standard NK model, the assumed price setting behaviour: is consistent with micro data on price setting frequency; gives rise to an accelerating Phillips curve that is steeper during expansions and flatter during recessions; explains shifts in the Phillips curve associated with different historical episodes without relying on implausible high cost-push shocks and nominal rigidities.

Suggested Citation

  • Gasteiger, Emanuel & Grimaud, Alex, 2020. "Price setting frequency and the Phillips Curve," ECON WPS - Working Papers in Economic Theory and Policy 03/2020, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.
  • Handle: RePEc:zbw:tuweco:032020
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    References listed on IDEAS

    as
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    5. Adriana Cornea-Madeira & Cars Hommes & Domenico Massaro, 2019. "Behavioral Heterogeneity in U.S. Inflation Dynamics," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(2), pages 288-300, April.
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    More about this item

    Keywords

    Price setting; inflation dynamics; monetary policy; Phillips curve;
    All these keywords.

    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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