Citation

Discussion Paper Details

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Title: Logit Price Dynamics

Author(s): James Costain and Anton Nakov

Publication Date: July 2015

Keyword(s): information-constrained prices, logit equilibrium, near rationality, nominal rigidity and state-dependent pricing

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We model retail price stickiness as the result of errors due to costly decision-making. Under our assumed cost function for the precision of choice, the timing of price adjustments and the prices firms set are both logit random variables. Errors in the prices firms set help explain micro ?puzzles? relating to the sizes of price changes, the behavior of adjustment hazards, and the variability of prices and costs. Errors in adjustment timing increase the real effects of monetary shocks, by reducing the ?selection effect?. Allowing for both types of errors also helps explain how trend inflation affects price adjustment.

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Bibliographic Reference

Costain, J and Nakov, A. 2015. 'Logit Price Dynamics'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10731