Precautionary price stickiness

James Costain and Anton Nakov

Journal of Economic Dynamics and Control, 2015, vol. 58, issue C, 218-234

Abstract: This paper proposes a model in which retail prices are sticky even though firms can always change their prices at zero cost. Instead of imposing a “menu cost”, we assume that more precise decisions are more costly. In equilibrium, firms optimally make some errors in price-setting, thus economizing on managerial time. Both the time cost of choice, and the resulting risk of errors, give firms an incentive to leave their prices unchanged until they perceive a sufficiently costly deviation from the optimal price. We show that this error-prone “control cost” framework helps explain many puzzling observations from microdata. However, on the macroeconomic side, pricing errors do little to explain the real effects of monetary shocks.

Keywords: State-dependent pricing; (S,s) adjustment; Logit equilibrium; Control costs; Near-rational behavior (search for similar items in EconPapers)
JEL-codes: C72 D81 E31 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188915001219
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Precautionary price stickiness (2014)
Working Paper: Precautionary price stickiness (2011)
Working Paper: Precautionary price stickiness (2011)
Working Paper: Precautionary price stickiness (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:58:y:2015:i:c:p:218-234

DOI: 10.1016/j.jedc.2015.06.012

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().