Time-varying (S, s) band models: empirical properties and interpretation

Erwan Gautier () and Hervé LE BIHAN ()

Documents de Travail from Banque de France

Abstract: . A recent strand of empirical work uses (S; s) models with time-varying stochastic bands to describe infrequent adjustments of prices and other variables. The present paper examines some properties of this model, which encompasses most micro-founded adjustment rules rationalizing infrequent changes. We illustrate that this model is also flexible enough to fit data characterized by infrequent adjustment and variable adjustment size. We show that, to the extent that there is variability in the size of adjustments (e.g. if both small and large price changes are observed), i) a large band parameter is needed to fit the data and ii) the average band of inaction underlying the model may differ strikingly from the typical observed size of adjustment. The paper thus provides a rationalization of a recurrent empirical result: very large estimated values for the parameters measuring the band of inaction.

Keywords: (S; s) models; adjustment costs; menu costs. (search for similar items in EconPapers)
JEL-codes: E31 D43 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:bfr:banfra:231

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