Regular Adjustment - Theory and Evidenc

Fabio Rumler ()

Working Papers from Wilfrid Laurier University, Department of Economics

Abstract: We ask why, in many circumstances and many environments, decision-makers choose to act on a time-regular basis (e.g. adjust every six weeks, etc.) or on a state-regular basis (e.g. change an interest rate by 0.25%, etc.), even though such an approach appears suboptimal. The paper attributes regular behaviour to adjustment cost heterogeneity. The reasons for this heterogeneity are discussed. We show that, given the cost heterogeneity, the likelihood of adopting regular policies depends on the shape of the benefit function: the flatter it is, the more likely, ceteris paribus, is regular adjustment. In general, however, there is no clear relationship between the degree of cost and benefit function heterogeneity and the incidence of regular adjustment. We provide sufficient conditions under which the less frequent are adjustments, the greater is the incidence of regular policies. To test the model we use a large Austrian data set, which consists of the direct price information collected by the statistical office and covers 80% of the CPI over eight years. We run cross-sectional tests, regressing the proportion of attractive prices and, separately, the excess proportion of price changes at the beginning of a year and at the beginning of a quarter, on various conditional frequencies of adjustment, inflation and its variability, dummies for good types, and other relevant variables. The results provide strong support for the model: the lower is, in a given market, the conditional frequency of price changes, the higher is the incidence of time- and state-regular adjustment.

Keywords: Optimal pricing; attractive prices; menu costs (search for similar items in EconPapers)
JEL-codes: E31 L11 E52 D01 (search for similar items in EconPapers)
Date: 2006, Revised 2006
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Related works:
Working Paper: Regular Adjustment. Theory and Evidence (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:wlu:wpaper:eg0055

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