Why are gasoline prices sticky? A test of alternative models of price adjustment
Article first published online: 1 SEP 2009
Copyright © 2009 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 25, Issue 6, pages 903–928, September/October 2010
How to Cite
Douglas, C. and Herrera, A. M. (2010), Why are gasoline prices sticky? A test of alternative models of price adjustment. J. Appl. Econ., 25: 903–928. doi: 10.1002/jae.1115
- Issue published online: 1 SEP 2009
- Article first published online: 1 SEP 2009
- Manuscript Revised: 22 JAN 2009
- Manuscript Received: 25 JUL 2008
Macroeconomic models of business cycles rely on the assumption that firms adjust prices infrequently to generate the short-run non-neutrality of money documented by the monetary transmission literature. They posit different mechanisms to generate price stickiness, with correspondingly different implications for inflation dynamics. Using an autoregressive conditional binomial model, we test which mechanism is most consistent with the pattern of price adjustment found in daily wholesale gasoline price data. Our results lead us to reject menu costs and information-processing delays but suggest that strategic considerations related to the idea of ‘fair pricing’ play an important role in accounting for price stickiness. Copyright © 2009 John Wiley & Sons, Ltd.