Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154126
Authors: 
Costain, James
Nakov, Anton
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper 1693
Abstract: 
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.
Subjects: 
information-constrained pricing
logit equilibrium
near rationality
nominal rigidity
state-dependent pricing
JEL: 
E31
D81
C73
Document Type: 
Working Paper

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