Makoto Nirei and
JosÃ© A. Scheinkman
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JosÃ© A. Scheinkman: Columbia University, Princeton University and NBER
No CARF-F-510, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo
We present a menu-cost pricing model with a large but finite number n of firms. A firmâ€™s nominal price increase lowers other firmsâ€™ relative prices, thereby inducing further nominal price increases. The distribution of these repricing avalanches converges as n â†’âˆž to a mixture of Generalized Poisson Distributions (GPD) with an index of dispersion= 1/(1-Î¸)Â², where Î¸Â is determined by the equilibrium of the continuous limit. We calibrate the model to the U.S. experience during 1988â€“2005 and obtain a Î¸Â surprisingly close to unity. Simulations show that a GPD fits well the distribution of avalanches but that, once we account for the dynamics, the multiplier effect derived from a firm adjusting prices by paying menu costs is even larger. We also show that the model can account for the positive relationship between inflation level and volatility that was observed in 1988â€“2005 in the U.S.
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Working Paper: Repricing Avalanches (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf510
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