Heterogeneous firm dynamics and price setting behavior

Bing Ma and Min Zheng

Finance Research Letters, 2022, vol. 46, issue PB

Abstract: Empirical studies in reset price inflation find it difficult to justify volatile actual inflation while maintaining the volatility of reset price inflation at a reasonably low level. Firm's price setting behavior plays an important role in generating volatility of inflation. This paper employs an innovative approach by introducing firm heterogeneity into a micro-founded Calvo-type partial equilibrium model to study price setting behavior and demonstrates that granularity is a potential solution to the reset price inflation puzzle. Granular effects are also shown to be robust under different sets of parameter values.

Keywords: Heterogeneous firms; Granularity; Price setting behavior; Idiosyncratic shock (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321003858

DOI: 10.1016/j.frl.2021.102383

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