The (Q,S,s) pricing rule: a quantitative analysis

Kenneth Burdett and Guido Menzio

Research in Economics, 2017, vol. 71, issue 4, 784-797

Abstract: Are nominal prices sticky because menu costs prevent sellers from continuously adjusting their prices to keep up with inflation or because search frictions make sellers indifferent to any real price over some non-degenerate interval? The paper answers the question by developing and calibrating a model in which both search frictions and menu costs may generate price stickiness and sellers are subject to idiosyncratic shocks. The equilibrium of the calibrated model is such that sellers follow a (Q,S,s) pricing rule: each seller lets inflation erode the effective real value of the nominal prices until it reaches some point s and then pays the menu cost and sets a new nominal price with an effective real value drawn from a distribution with support [S, Q], with s < S < Q. Idiosyncratic shocks short-circuit the repricing cycle and may lead to negative price changes. The calibrated model reproduces closely the properties of the empirical price and price-change distributions. The calibrated model implies that search frictions are the main source of nominal price stickiness.

Keywords: Search frictions; Menu costs; Sticky prices (search for similar items in EconPapers)
JEL-codes: D11 D21 D43 E32 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: The (Q,S,s) Pricing Rule: A Quantitative Analysis (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:71:y:2017:i:4:p:784-797

DOI: 10.1016/j.rie.2017.09.003

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