Repricing Avalanches / Makoto Nirei, José A. Scheinkman.

Format:

Book

Author/Creator:

Nirei, Makoto.

Contributor:

National Bureau of Economic Research.

Scheinkman, José A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28654.

NBER working paper series no. w28654

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

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.

Notes:

Print version record

April 2021.