The (Q,S,s) Pricing Rule: A Quantitative Analysis

Kenneth Burdett () and Guido Menzio
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Kenneth Burdett: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Are nominal prices sticky because menu costs prevent sellers from continuously adjusting their prices to keep up with inflation or because search frictions make sellers indifferent to any real price over some non-degenerate interval? The paper answers the question by developing and calibrating a model in which both search frictions and menu costs may generate price stickiness and sellers are subject to idiosyncratic shocks. The equilibrium of the calibrated model is such that sellers follow a (Q,S,s) pricing rule: each seller lets inflation erode the effective real value of the nominal prices until it reaches some point s and then pays the menu cost and sets a new nominal price with an effective real value drawn from a distribution with support [S,Q], with s

Keywords: Search frictions; Menu costs; Sticky prices (search for similar items in EconPapers)
JEL-codes: D11 D21 D43 E32 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2017-09-25, Revised 2017-09-25
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: The (Q,S,s) pricing rule: a quantitative analysis (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:17-018

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