Behavioral Sticky Prices

Rebelo, Sérgio, Miguel Santana and Pedro Teles

No 18884, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study a model where households make decisions according to a dual process framework widely used in cognitive psychology. System 1 uses effortless heuristics but is susceptible to biases and errors. System 2 uses mental effort to make more accurate decisions. Through their pricing behavior, monopolistic producers can influence whether households deploy Systems 1 or 2. The strategic use of this influence creates a new source of price inertia and provides a natural explanation for the †rockets and feathers†phenomenon: prices rise quickly when costs increase but fall slowly when costs fall. Our model implies that price stability is not optimal.

Keywords: Sticky prices; System 1 and 2 (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E71 (search for similar items in EconPapers)
Date: 2024-03
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Working Paper: Behavioral Sticky Prices (2024)
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