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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: E31 D81 C72 (search for similar items in EconPapers)
Date: 2015
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Related works:
Working Paper: Precautionary price stickiness (2014) Downloads
Working Paper: Precautionary price stickiness (2011) Downloads
Working Paper: Precautionary price stickiness (2011) Downloads
Working Paper: Precautionary price stickiness (2010) Downloads
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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