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Price Adjustments in a General Model of State-Dependent Pricing

Authors


  • We are grateful for helpful comments from Michael Reiter, Virgiliu Midrigan, the editor, and two anonymous referees, and also from seminar participants at the Vienna IAS, the Bank of Spain, the 2008 SNDE meetings and the 2008 REDg-DGEM workshop. We especially thank Virgiliu Midrigan, Etienne Gagnon, and Oleksiy Kryvtsov for providing their data. Views expressed here are those of the authors and do not necessarily coincide with those of the Bank of Spain or the Eurosystem.

Abstract

We study the distribution of retail price adjustments under the assumption that firms are more likely to adjust their prices when doing so is more valuable. Our setup nests Calvo (1983) at one extreme and a fixed menu cost model at the other; all parameterizations are ranked by a measure of state dependence. High state dependence implies, counterfactually, that there are no small price changes and that the variance of price changes falls sharply with trend inflation. The parameterization that best fits microdata has low state dependence, implying a Phillips curve coefficient 60% as large as that of the Calvo model, but is nonetheless well behaved at high inflation rates.

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