Logit price dynamics

Arbeitspapier

We model retail price stickiness as the result of errors due to costly decision-making. Under our assumed cost function for the precision of choice, the timing of price adjustments and the prices firms set are both logit random variables. Errors in the prices firms set help explain micro “puzzles” relating to the sizes of price changes, the behavior of adjustment hazards, and the variability of prices and costs. Errors in adjustment timing increase the real effects of monetary shocks, by reducing the “selection effect”. Allowing for both types of errors also helps explain how trend inflation affects price adjustment.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1693

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Criteria for Decision-Making under Risk and Uncertainty ; Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
• Subject: information-constrained pricing ; logit equilibrium ; near rationality ; nominal rigidity ; state-dependent pricing

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Costain, James ; Nakov, Anton
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/154126
• Last update: 10.03.2025, 11:41 AM CET