What is a realistic value for price adjustment costs in New Keynesian models?

Benjamin Keen and Yongsheng Wang

Applied Economics Letters, 2007, vol. 14, issue 11, 789-793

Abstract: Rotemberg's (1982) price adjustment costs framework is a popular sticky price specification; yet, the data provides little information on the magnitude of those costs. This article finds a plausible range of parameterizations for those price adjustment costs. Our results show that the specific size of the price adjustment costs depends on the average markup of price over real marginal cost and the average time firms wait to reoptimize their price. In particular, the price adjustment costs are higher when the average markup is lower and the mean time between price reoptimizations is longer.

Date: 2007
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DOI: 10.1080/13504850600592739

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