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Time-dependent or state-dependent pricing? Evidence from a large devaluation episode

Feltrin Jr, Celio and Guimaraes, Bernardo (2015) Time-dependent or state-dependent pricing? Evidence from a large devaluation episode. CFM discussion paper series (CFM-DP2015-04). Centre For Macroeconomics, London, UK.

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Abstract

The real effects of monetary policy depend on the reasons behind price stickiness. In models with time-dependent pricing, firms readjust prices at previously (and possibly endogenously) determined times. In constrast, with state-dependent price setting, prices are readjusted whenever they are far enough from their desired levels, so a monetary shock leads firms to adjust their prices, which dampens the real effects of monetary policy. This paper explores the distinct predictions of price-setting models on how the frequency and magnitude of price adjustment react to shocks in order to distinguish between models. Consider a positive shock to the desired prices of goods (the prices that would be charged in the absence of frictions). In the simplest state-dependent models (e.g., Caplin and Spulber (1987)), a firm raises the price of its good whenever the difference between the desired and current price hits a constant threshold. Hence a positive shock to desired prices raises the frequency of price changes but leaves the magnitude of price changes unaffected. In recent models of state-dependent price setting, shocks might have some effect on the magnitude of price changes, but the response of the frequency of price adjustment to shocks is a key feature of all these models.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2015 The Authors
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 14 Dec 2017 13:13
Last Modified: 30 Jan 2019 12:27
URI: http://eprints.lse.ac.uk/id/eprint/86321

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