Estimation of Adjustment Costs in a Model of State-Dependent Pricing

FRB of Kansas City Research Working Paper No. 00-07

39 Pages Posted: 23 Jun 2001

Date Written: December 2000

Abstract

This paper provides a framework for direct analysis of the underlying price adjustment costs in an industry. A dynamic programming problem is specified for monopolistically competitive firms that face idiosyncratic costs of price adjustment. A numerical solution is calculated using value function iteration. I estimate the structural parameters of the model using data on magazine cover prices. Among the parameters estimated are the mean, variance, and persistence of the adjustment cost process. The estimated distribution of adjustment costs is nondegenerate, and the average adjustment cost paid by firms is large in comparison to other results in the literature.

Keywords: State-Dependent Pricing, Menu Costs, Price Adjustment, Indirect Inference

JEL Classification: E31, D40, L11

Suggested Citation

Willis, Jonathan, Estimation of Adjustment Costs in a Model of State-Dependent Pricing (December 2000). FRB of Kansas City Research Working Paper No. 00-07, Available at SSRN: https://ssrn.com/abstract=272413 or http://dx.doi.org/10.2139/ssrn.272413

Jonathan Willis (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States
816-881-2852 (Phone)
816-881-2199 (Fax)

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