Price Setting Frequency and the Phillips Curve

53 Pages Posted: 13 Jul 2020 Last revised: 25 Feb 2021

See all articles by Alex Grimaud

Alex Grimaud

University of Amsterdam; Catholic University of Milan

Emanuel Gasteiger

Free University of Berlin (FUB)

Date Written: June 19, 2020

Abstract

We develop a New Keynesian (NK) model with endogenous price setting frequency. Whether a firm updates its price in a given period depends on an analysis of expected cost and benefits modeled by a discrete choice process. A firm decides to update the price when expected benefits outweigh expected cost and then resets the price optimally. As markups are countercyclical, the model predicts that prices are more flexible during expansions and less flexible during recessions. Our quantitative analysis shows that contrary to the standard NK model, the assumed price setting behaviour: is consistent with micro data on price setting frequency; gives rise to an accelerating Phillips curve that is steeper during expansions and flatter during recessions; explains shifts in the Phillips curve associated with different historical episodes without relying on implausible high cost-push shocks and nominal rigidities.

Keywords: Price setting, inflation dynamics, monetary policy, Phillips curve

JEL Classification: E31, E32, E52

Suggested Citation

Grimaud, Alex and Gasteiger, Emanuel, Price Setting Frequency and the Phillips Curve (June 19, 2020). Available at SSRN: https://ssrn.com/abstract=3630892 or http://dx.doi.org/10.2139/ssrn.3630892

Alex Grimaud (Contact Author)

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands
20123 (Fax)

HOME PAGE: http://https://www.uva.nl/en/profile/g/r/a.b.p.grimaud/a.b.p.grimaud.html

Catholic University of Milan ( email )

Largo Gemelli 1
Milan, MI Milano 20123
Italy

HOME PAGE: http://https://centridiricerca.unicatt.it/complexity-home

Emanuel Gasteiger

Free University of Berlin (FUB) ( email )

Van't-Hoff-Str. 8
Berlin, Berlin 14195
Germany

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