Repricing Avalanches

Makoto Nirei and José A. Scheinkman

Journal of Political Economy, 2024, vol. 132, issue 4, 1327 - 1388

Abstract: We present a menu-cost pricing model with a large but finite number n of firms. A firm’s nominal price increase lowers other firms’ relative prices, thereby inducing further nominal price increases. The distribution of these “repricing avalanches” converges as n→∞ to a mixture of generalized Poisson distributions with an indexofdispersion=1/(1−θ)2, where θ is determined by the equilibrium of the continuous limit. We calibrate the model to the US experience during 1988–2005 and obtain a θ surprisingly close to unity. Our model accounts for the positive relationship between inflation level and volatility observed in the data.

Date: 2024
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Related works:
Working Paper: Repricing Avalanches (2021)
Working Paper: Repricing Avalanches (2021)
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