Models of Price Setting and Inflation Dynamics

42 Pages Posted: 22 May 2024

See all articles by James S. Costain

James S. Costain

Banco de España - Research Department

Anton Nakov

European Central Bank (ECB); CEPR

Date Written: May 21, 2024

Abstract

We review models of nominal price adjustment based on optimizing or near-optimal behavior, including menu cost models, generalized hazard function models and models of frictional decisions. We also discuss the role of real rigidities and assess the models’ success in explaining retail microdata and inflation dynamics.

Keywords: sticky prices, nominal rigidities, state-dependent prices, inflation, menu costs, control costs, rational inattention

JEL Classification: E31, E71

Suggested Citation

Costain, James S. and Nakov, Anton A., Models of Price Setting and Inflation Dynamics (May 21, 2024). Banco de Espana Occasional Paper No. 2416, Available at SSRN: https://ssrn.com/abstract=4837383

James S. Costain (Contact Author)

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

Anton A. Nakov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

CEPR ( email )

London
United Kingdom

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