Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153809
Authors: 
Costain, James
Nakov, Anton
Year of Publication: 
2011
Series/Report no.: 
ECB Working Paper 1375
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), but fits microdata better than their specification.
Subjects: 
(S
information-constrained pricing
Logit equilibrium
near rationality
s) adjustment
state-dependent pricing
JEL: 
E31
D81
C72
Document Type: 
Working Paper

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