time varying s s band models properties and interpretation a recent strand of empirical work uses s s models with time varying stochastic bands to describe infrequent adjustments of prices and other variables the present paper examines some properties of this model which encompasses most micro founded adjustment rules rationalizing infrequent changes we illustrate that this model is flexible enough to fit data characterized by infrequent adjustment and variable adjustment size we show that to the extent that there is variability in the size of adjustments e g if both small and large price changes are observed i a large band parameter is needed to fit the data and ii the average band of inaction underlying the model may differ strikingly from the typical observed size of adjustment the paper thus provides a rationalization for a recurrent empirical result very large estimated values for the parameters measuring the band of inaction

price changes in the euro area and the united states some facts from individual consumer price data prices of goods and services do not adjust immediately in response to changing demand and supply conditions this paper characterizes the average frequency and size of price changes in the euro area and its member countries investigates the determinants of the probability of price changes and compares the evidence for the euro area with available u s results the facts documented in this paper are based on evidence from individual price data recorded at the store level in all euro area countries except ireland and greece that is in datasets covering austria belgium finland france germany italy luxembourg the netherlands portugal and spain which together account for around 97 percent of euro area gdp the data used are the monthly price records underlying the computation of national consumer price indices and harmonized consumer price indices these data cover a large number of products selected on the basis of extensive household budget surveys

analytical approximations in models of hysteresis decisions made under ongoing uncertainty and costly reversibility entail a range of the state variable where inaction is optimal which in turn produces hysteresis permanent effects of temporary shifts the range is usually defined by non linear equations that need numerical solutions in this paper a technique of analytical approximations is developed and applied to two models menu costs and investment the resulting explicit solutions help clarify why hysteresis is important even for small irreversibility in the menu cost model hysteresis is two orders of magnitude larger than under the akerlof yellen or mankiw assumptions when decisions that are costly to reverse are made under conditions of ongoing uncertainty the optimum policy usually entails a range of inertia the action should be taken only when the value of the underlying state variable becomes especially favourable and reversed only when it becomes especially unfavourable there is an intermediate range over which inaction is optimal this in turn gives rise to hysteresis starting from a value in the range of inertia if the state variable crosses the action trigger point and then returns to its original level the action will be taken but not reversed thus a temporary change will leave a permanent effect numerical solutions for models of irreversible investment show that the range of inaction is remarkably large even when the cost of reversal is small see brennan and schwartz 1985 constantinides 1986 and dixit 1989a b for examples of this unfortunately the equations tlhat determine the optimum policy are highly non linear they do not have analytical solutions therefore we lack a clearer and more general understanding of why hysteresis is numerically so important in this paper i derive analytical approximations for the solutions of more general problems of this kind when the costs of change are small the idea that small costs of change induce large amounts of inertia has been popularized in the model of akerlof and yellen 1985 mankiw 1985 and others in these models second order small costs of making price changes yield price stickiness in response to first order changes in the money supply this is a simple application of the envelope theorem but these models are static and their application to a dynamic reality must assume either permanent shocks or static expectations when there is ongoing uncertainty which is rationally expected by the decision maker the option value of the status quo enlarges the zone where inaction is optimal adding these features to the mankiw akerlof yellen may model i show that fourth order small costs of change generate first order inertia

deregulation redux does mandating access to bottleneck facilities necessarily improve welfare we demonstrate that deregulation in the form of vertical separation of network components into natural monopoly and potentially competitive markets does not truly represent a lessening of regulatory burdens that is vertical separation is not synonymous with deregulation more competitors is not equivalent to more competition we assume a public interest regulator that is constrained to set a unit price that maximizes expected welfare subject to a break even constraint we show that under both symmetric and asymmetric information cases the information demands on the regulator of the vertically integrated system are no greater than those in the case of vertical separation

lumpy price adjustments a microeconometric analysis based on a reduced form state dependent pricing model with random thresholds we specify and estimate a nonlinear panel data model with an unobserved factor representing the common cost or demand components of the unobserved optimal price using this model we are able to assess the relative importance of common and idiosyncratic shocks in explaining the frequency and magnitude of price changes in the case of a wide variety of consumer products in belgium and france we find that the mean level and variability of the random thresholds are key for explaining differences across products in the frequency of price changes we also find that the idiosyncratic shocks represent the most important driver of the magnitude of price changes supplementary materials for this article are available online

menu costs and phillips curves this paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation sellers can change price only by incurring a real menu cost we calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new u s data set of individual prices due to klenow and kryvtsov the prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies the model is also used to conduct numerical experiments on the economy s response to various shocks in none of the simulations we conducted did monetary shocks induce large or persistent real responses

micro and macro price dynamics in daily data abstract using japanese daily scanner data with three billion observations of prices and quantities from 1988 to 2005 this paper investigates micro and macro price dynamics these data reveal that the frequency of price changes is much larger than that found in standard monthly datasets the price change frequency exhibits a clear trend and strong across store heterogeneity which casts doubts on standard new keynesian assumptions the consumer price index cpi based on scanner data appears to track the official cpi relatively well except for a period in which the latter arguably had an upward bias

heterogeneity in consumer price stickiness we examine heterogeneity in price stickiness using a large original set of individual price data collected at the retail level for the computation of the french consumer price index for that purpose we estimate at a very high level of disaggregation a piecewise constant hazard model as well as competing risks duration models that distinguish between price increases price decreases and product replacements the main findings are the following a at the product outlet type level the baseline hazard function of a price spell is nondecreasing b cross product and cross outlet type heterogeneity is pervasive both in the shape and the level of the hazard function as well as in the impact of covariates c there is strong evidence of state dependence especially for price increases d there is an asymmetry because determinants of price increases differ from those of price decreases

production efficiency and optimal pricing in intermediate good regulated industries abstract this paper reconsiders the relationship that exists between the production efficiency result of diamond and mirrlees and the ramsey rule specifically the paper considers a general equilibrium hierarchical structure of production one industry sells at least some of its output to another regulated industry a single regulatory agency must balance the budgets of all regulated industries in the aggregate so as to maximize the utility of a representative individual the ramsey rule always holds pricing rules however are far more complex the optimum may have some negative price cost margins and may not involve production efficiency

explaining investment dynamics in u s manufacturing a generalized s s approach we are grateful to olivier blanchard whitney newey james stock an editor three anonymousreferees and seminar participants at brown cepr champoussin chicago columbia econometric society meetings caracas and tokyo efcc harvard impa lse nber princeton rochester site toronto u de chile and yale for their comments financial support to caballero from the national science and sloan foundations and to engel from fondecyt grant 195 510 and the mellon foundation grant 9608 is gratefully acknowledged 2since plants entry is excluded from their sample these statistics are likely to represent lowerbounds on the degree of lumpiness in plants investment patterns 3we use the word project to emphasize the fact that the actual implementation of a projectmay cover more than a year observation realistic time to build aspects of investment are not incontradiction with the view that investment episodes are lumpy in nature 4 see chirinko 1994 for a survey of the empirical investment literature

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

price adjustments by a gasoline retail chain we use daily data to examine price responses in the swedish gasoline market to changes in the rotterdam spot price exchange rates and taxes the distribution of price adjustments by a leading retail chain for the period january 1980 to december 1996 is symmetric with no small adjustments an error correction model shows that in the short run prices gradually move towards the long run equilibrium in response to cost shocks there is some evidence that also in the short run prices are stickier downwards than upwards prices respond more rapidly to exchange rate movements than to the spot market price our analysis emphasizes that to fully understand price adjustments it is necessary to examine data sets where the sample frequency at least matches that of price adjustments

price stickiness in ss models new interpretations of old results abstract what is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks the answer to this question ranges from a one to one link calvo g 1983 prices in a utility maximizing framework journal of monetary economics 12 383 398 to no connection whatsoever caplin a spulber d 1987 menu costs and the neutrality of money quarterly journal of economics 102 703 726 the purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results in doing so we propose new interpretations of key results in this area which in turn suggest the kind of ss model that is likely to generate substantial price rigidity among these new interpretations we revisit caplin and spulber s monetary neutrality result we show that when price stickiness is measured in terms of the impulse response function this result is not a consequence of aggregation as is often assumed but is due instead to the absence of price stickiness at the microeconomic level we also show that the selection effect according to which units that adjust their prices are those that benefit the most is neither necessary nor sufficient to account for the higher aggregate flexibility of ss type models compared to calvo models instead the key concept is the contribution of the extensive margin of adjustment to the aggregate price response the aggregate price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive

public pricing under imperfect competition abstract existing literature on second best pricing assumes that regulatory control encompasses all industries subject to distortion this paper extends the theory in a game theoretic framework to incorporate market power outside the regulated sector we find that in this situation price always exceeds marginal cost in the public firm and that the profit constraint for the public firm need not be binding in addition the existence of pricing distortions outside the regulated sector can actually increase welfare

discrete choice modelling of urban housing markets a critical review and an application the housing choice literature is a vast area of housing research which has resulted in giant leaps forward in recent years in terms of its econometric modelling this is due in large part to the significant increases now available in computing power allowing researchers to combine the latest advances in theory with empirical application this paper brings together and critically reviews the housing choice literature and techniques that have been used to model the household s housing choice decision the basic multinomial logit model is reviewed alongside the more recent advances in discrete choice modelling the nested multinomial logit model and the heteroscedastic extreme value model the various techniques are illustrated using data from the australian census of 1986 and 1996 to model housing choice in sydney the results show that careful consideration must be given to the assumptions underlying any chosen modelling technique if one is not to draw misleading conclusions from the analysis

new evidence on asymmetric gasoline price responses in a 1997 paper borenstein cameron and gilbert bcg claim that gasoline prices rise quickly following an increase in the price of crude oil but fall slowly following a decrease this note estimates an error correction model with daily spot gasoline and crude oil price data over the period 1985 1998 and finds no evidence of asymmetry in wholesale gasoline prices the sources of the difference in results are twofold first we use the standard engle granger two step estimation procedure whereas bcg used a nonstandard estimation methodology second even using bcg s nonstandard specification the use of daily rather than weekly data yields little evidence of price asymmetry

second best pricing of publicly produced inputs the case of downstream imperfect competition abstract efficient second best pricing is examined for a public enterprise facing two distortions a profit constraint and imperfect competition among some customer industries we suggest a measure of downstream industry distortion for the purpose of efficient pricing the pricing rule contains two opposing elements the shadow value of public profit and this measure of the downstream distortion whose sum determines whether the efficient second best input price is above or below marginal cost efficient pricing normally implies relative subsidization of imperfectly competitive downstream firms

optimal price setting with observation and menu costs we study the price setting problem of a firm in the presence of both observation and menu costs in this problem the firm optimally decides when to collect costly information on the adequacy of its price an activity which we refer to as a price review upon each review the firm chooses whether to adjust its price subject to a menu cost and when to conduct the next price review this behavior is consistent with recent survey evidence documenting that firms revise prices infrequently and that only a few price revisions yield a price adjustment the goal of the paper is to study how the firm s choices map into several observable statistics depending on the level and relative magnitude of the observation vs the menu cost the observable statistics are the frequency of price reviews the frequency of price adjustments the size distribution of price adjustments and the shape of the hazard rate of price adjustments we provide an analytical characterization of the firm s decisions and a mapping from the structural parameters to the observable statistics we compare these statistics with the ones obtained for the models with only one type of cost the predictions of the model can with suitable data be used to quantify the importance of the menu cost vs the information cost we also consider a version of the model where several price adjustment are allowed between observations a form of price plans or indexation we find that no indexation is optimal for small inflation rates

frequent price changes under menu costs abstract this paper investigates the effect of uncertainty on a single firm s pricing behaviour in a dynamic menu cost model that results in s s rules where the price is fixed inside a band it will be demonstrated that even though the band of inaction widens in response to increased uncertainty the price may be changed more frequent in the short run and in the long run it definitely will hence observing frequent price changes is not necessarily inconsistent with a firm operating under menu costs this paper relies on an article by dixit 1991 review of economic studies 58 141 151 but it offers a different solution technique in particular the solution of the model will be derived explicitly unlike dixit where approximations are resorted to

price flexibility in channels of distribution evidence from scanner data in this study we empirically examine the extent of price rigidity using a unique store level time series data set consisting of i actual retail transaction prices ii actual wholesale transaction prices which represent both the retailers costs and the prices received by manufacturers and iii a measure of manufacturers costs for 12 goods in two widely used consumer product categories we simultaneously examine the extent of price rigidity for each of the 12 products at both final goods and intermediate goods levels we study two notions of price rigidity employed in the existing literature i the frequency of price changes and ii the response of prices to exogenous cost changes we find that retail prices exhibit remarkable flexibility in terms of both notions of price rigidity i e they change frequently and they seem to respond quickly and fully to cost changes furthermore we find that retail prices respond not just to their direct costs but also to the upstream manufacturers costs which further reinforces the extent of the retail price flexibility at the intermediate goods level of the market in contrast we find relatively more evidence of rigidity in the response of manufacturers prices to cost changes this despite the fact that wholesale prices change frequently and therefore exhibit flexibility according to the first notion of price rigidity

the pass through of oil prices into euro area consumer liquid fuel prices in an environment of high and volatile oil prices abstract crude and refined oil prices have been relatively high and volatile on a sustained basis since 1999 this paper considers the pass through of oil prices into consumer liquid i e petrol diesel and heating fuel prices in such an environment the pass through of oil prices into consumer liquid fuel prices has already been addressed extensively in the literature nonetheless much of this literature has either focused on the united states or on a time period when oil prices were relatively stable or has used monthly data the main contribution of this paper is a comprehensive combination of many features that have been considered before but rarely jointly these features include 1 the analysis of the euro area as an aggregate and a large number of countries the initial 12 member states 2 the consideration of different time periods 3 the modelling of the data in raw levels rather than in log levels this turns out to have important implications for our findings 4 the use of high frequency weekly data which as results will suggest are the lowest frequency one should consider 5 the investigation of the different stages of the production chain from crude oil prices to retail distribution refining costs and margins distribution and retailing costs and margins 6 the examination of prices including and excluding taxes excise and value added 7 the modelling of prices for three fuel types passenger car petrol and diesel separately and home heating fuel oil 8 lastly we also address the issue of possible asymmetries allowing for the pass through to vary according to a whether price are increasing or decreasing and b whether price levels are above or below their equilibrium level the main findings are as follows first as distribution and retailing costs and margins have been broadly stable on average the modelling of the relationship between consumer prices excluding taxes and upstream prices in raw levels rather than in logarithms has important implications for the stability of estimates of pass through when oil price levels rise significantly second considering spot prices for refined prices improves significantly the fit of the estimated models relative to using crude oil prices it also results in more economically meaningful results concerning the extent of pass through third oil price pass through occurs quickly with 90 occurring within three to five weeks fourth using a relatively broad specification allowing for asymmetry in the pass through from upstream to downstream prices there is little evidence of statistically significant asymmetries furthermore even where asymmetry is found to be statistically significant it is generally not economically significant lastly these results generally hold across most euro area countries with few exceptions

linking individual and aggregate price changes this paper studies the implications of lumpiness and heterogeneity in microeconomic pricing decisions for dynamics in price aggregates to capture the latent deviation between actual and target prices it develops a semi structural empirical model of two sided s s price setting applying the model to a unique panel of store level retail prices reveals that fluctuations in the shape of cross sectional price deviation densities contain extra information on aggregate price change dynamics asymmetry in the density particularly matters idiosyncratic shocks magnify the size but do not alter the direction of aggregate fluctuations when the target price is proxied by the cross store mean price the link between inflation and the price deviation density disappears

holiday price rigidity and cost of price adjustment the thanksgiving christmas holiday period is a major sales period for us retailers due to higher store traffic tasks such as restocking shelves handling customers questions and inquiries running cash registers cleaning and bagging become more urgent during holidays as a result the holiday period opportunity cost of price adjustment may increase dramatically for retail stores which should lead to greater price rigidity during holidays we test this prediction using weekly retail scanner price data from a major midwestern supermarket chain we find that indeed prices are more rigid during holiday periods than non holiday periods for example the econometric model we estimate suggests that the probability of a price change is lower during holiday periods even after accounting for cost changes moreover we find that the probability of a price change increases with the size of the cost change during both the holiday as well as non holiday periods we argue that these findings are best explained by higher price adjustment costs menu cost the retailers face during the holiday periods our data provides a natural experiment for studying variation in price rigidity because most aspects of market environment such as market structure industry concentration the nature of long term relationships contractual arrangements etc do not vary between holiday and nonholiday periods we therefore are able to rule out these commonly used alternative explanations for the price rigidity and conclude that the menu cost theory offers the best explanation for the holiday period price rigidity

asymmetries in price setting behavior new microeconometric evidence from switzerland in this paper we follow the recent empirical literature that has specified reduced form models for price setting that are closely tied to s s pricing rules our contribution to the literature is twofold first we propose an estimator that relaxes distributional assumptions on the unobserved heterogeneity second we use the estimator to examine the prevalence of positive price changes in a low inflation environment our model estimates suggest that if inflation falls from 0 9 to zero the share of positive price changes in all price changes falls from 63 6 to 56 2

pareto efficient international taxation this paper analyzes pareto efficient international tax regimes because every country faces its own national budget constraint the diamond mirrlees production efficiency theorem which underlies key tenets of policy advice in international taxation the desirability of destination basis for commodity taxation of the residence principle for capital income taxation and of free trade does not apply the paper establishes conditions relating to the availability of explicit or implicit devices for reallocating tax revenues across countries under which production efficiency is nevertheless desirable and characterizes the precise ways in which pareto efficient international taxation may require violation of established tenets

why are prices sticky the dynamics of wholesale gasoline prices the menu cost interpretation of sticky prices implies that the probability of a price change should depend on the past history of prices and fundamentals only through the gap between the current price and the frictionless price we find that this prediction is broadly consistent with the behavior of nine philadelphia gasoline wholesalers nevertheless we reject the menu cost model as a literal description of these firms behavior arguing instead that price stickiness arises from strategic considerations of how customers and competitors will react to price changes

state dependent pricing and the general equilibrium dynamics of money and output economists have long suggested that nominal product prices are changed infrequently because of fixed costs in such a setting optimal price adjustment should depend on the state of the economy yet while widely discussed statedependent pricing has proved difficult to incorporate into macroeconomic models this paper develops a new tractable theoretical state dependent pricing framework we use it to study how optimal pricing depends on the persistence of monetary shocks the elasticities of labor supply and goods demand and the interest sensitivity of money demand

optimal departures from marginal cost pricing focuses on departures from marginal cost pricing optimal allocation or resources level of tax revenue that will be collected by the government theorems developed for resource allocation ebsco

the dynamics of gasoline prices evidence from daily french micro data using millions of individual gasoline prices collected at a daily frequency we examine the speed at which market prices of refined oil are transmitted to retail gasoline prices in france for that we estimate a reduced form model of state dependent pricing where thresholds triggering price changes are allowed to vary over time and depend on the duration since the last price change we find that the degree of pass through of wholesale prices to retail gasoline prices is on average 0 77 for diesel and 0 67 for petrol and depend on local market characteristics the duration for a shock to be fully transmitted into prices is about 10 days there is no significant asymmetry in the transmission of wholesale price to retail prices finally the duration since the last price change has a significant effect on thresholds triggering price changes but a large variance of idiosyncratic shocks on thresholds is also crucial to replicate the size distribution of price changes

do gasoline prices respond asymmetrically to crude oil price changes the authors test and confirm that retail gasoline prices respond more quickly to increases than to decreases in crude oil prices among the possible sources of this asymmetry are production inventory adjustment lags and market power of some sellers by analyzing price transmission at different points in the distribution chain the authors attempt to shed light on these theories spot prices for generic gasoline show asymmetry in responding to crude oil price changes which may reflect inventory adjustment effects asymmetry also appears in the response of retail prices to wholesale price changes possibly indicating short run market power among retailers