Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

A Member of the Law Professor Blogs Network

Wednesday, October 19, 2011

Precautionary price stickiness

Posted by D. Daniel Sokol

James Costain (Banco de Espana) and Anton Nakov (Banco de Espana) address Precautionary price stickiness.

ABSTRACT: This paper proposes two models in which price stickiness arises endogenously even though firms are free to change their prices at zero physical cost. Firms are subject to idiosyncratic and aggregate shocks, and they also face a risk of making errors when they set their prices. In our first specification, firms are assumed to play a dynamic logit equilibrium, which implies that big mistakes are less likely than small ones. The second specification derives logit behavior from an assumption that precision is costly. The empirical implications of the two versions of our model are very similar. Since firms making sufficiently large errors choose to adjust, both versions generate a strong "selection effect" in response to a nominal shock that eliminates most of the monetary nonneutrality found in the Calvo model. Thus the model implies that money shocks have little impact on the real economy, as in Golosov and Lucas (2007), bu! t fits microdata better than their specification.

http://lawprofessors.typepad.com/antitrustprof_blog/2011/10/precautionary-price-stickiness-.html

| Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341bfae553ef015391be1492970b

Listed below are links to weblogs that reference Precautionary price stickiness :

Comments

Post a comment