EconPapers    
Economics at your fingertips  
 

Repricing Avalanches

Makoto Nirei () and Jose Scheinkman ()

No 28654, NBER Working Papers from National Bureau of Economic Research, Inc

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 (GPD), with an index of dispersion (variance/mean) that is a function of a single variable θ that is determined by the equilibrium of the continuous limit. The index of dispersion explodes as θ→1. We calibrate the model to the U.S. experience during 1988–2005 and obtain a θ 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 1988–2005 in the U.S.

JEL-codes: E31 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-bec and nep-mac
Note: AP ME
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.nber.org/papers/w28654.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
Working Paper: Repricing Avalanches (2021) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:28654

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w28654
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2021-11-08
Handle: RePEc:nbr:nberwo:28654