### Abstract

Are nominal prices sticky because menu costs prevent sellers from continuously adjusting their prices to keep up with inflation or because search frictions make sellers indifferent to any real price over some non-degenerate interval? The paper answers the question by developing and calibrating a model in which both search frictions and menu costs may generate price stickiness and sellers are subject to idiosyncratic shocks. The equilibrium of the calibrated model is such that sellers follow a (Q,S,s) pricing rule: each seller lets inflation erode the effective real value of the nominal prices until it reaches some point s and then pays the menu cost and sets a new nominal price with an effective real value drawn from a distribution with support [S, Q], with s < S < Q. Idiosyncratic shocks short-circuit the repricing cycle and may lead to negative price changes. The calibrated model reproduces closely the properties of the empirical price and price-change distributions. The calibrated model implies that search frictions are the main source of nominal price stickiness.

Original language | English (US) |
---|---|

Pages (from-to) | 784-797 |

Number of pages | 14 |

Journal | Research in Economics |

Volume | 71 |

Issue number | 4 |

DOIs | |

State | Published - Dec 1 2017 |

### Fingerprint

### Keywords

- Menu costs
- Search frictions
- Sticky prices

### ASJC Scopus subject areas

- Economics and Econometrics

### Cite this

*Research in Economics*,

*71*(4), 784-797. https://doi.org/10.1016/j.rie.2017.09.003

**The (Q,S,s) pricing rule : a quantitative analysis.** / Burdett, Kenneth; Menzio, Guido.

Research output: Contribution to journal › Article

*Research in Economics*, vol. 71, no. 4, pp. 784-797. https://doi.org/10.1016/j.rie.2017.09.003

}

TY - JOUR

T1 - The (Q,S,s) pricing rule

T2 - a quantitative analysis

AU - Burdett, Kenneth

AU - Menzio, Guido

PY - 2017/12/1

Y1 - 2017/12/1

N2 - Are nominal prices sticky because menu costs prevent sellers from continuously adjusting their prices to keep up with inflation or because search frictions make sellers indifferent to any real price over some non-degenerate interval? The paper answers the question by developing and calibrating a model in which both search frictions and menu costs may generate price stickiness and sellers are subject to idiosyncratic shocks. The equilibrium of the calibrated model is such that sellers follow a (Q,S,s) pricing rule: each seller lets inflation erode the effective real value of the nominal prices until it reaches some point s and then pays the menu cost and sets a new nominal price with an effective real value drawn from a distribution with support [S, Q], with s < S < Q. Idiosyncratic shocks short-circuit the repricing cycle and may lead to negative price changes. The calibrated model reproduces closely the properties of the empirical price and price-change distributions. The calibrated model implies that search frictions are the main source of nominal price stickiness.

AB - Are nominal prices sticky because menu costs prevent sellers from continuously adjusting their prices to keep up with inflation or because search frictions make sellers indifferent to any real price over some non-degenerate interval? The paper answers the question by developing and calibrating a model in which both search frictions and menu costs may generate price stickiness and sellers are subject to idiosyncratic shocks. The equilibrium of the calibrated model is such that sellers follow a (Q,S,s) pricing rule: each seller lets inflation erode the effective real value of the nominal prices until it reaches some point s and then pays the menu cost and sets a new nominal price with an effective real value drawn from a distribution with support [S, Q], with s < S < Q. Idiosyncratic shocks short-circuit the repricing cycle and may lead to negative price changes. The calibrated model reproduces closely the properties of the empirical price and price-change distributions. The calibrated model implies that search frictions are the main source of nominal price stickiness.

KW - Menu costs

KW - Search frictions

KW - Sticky prices

UR - http://www.scopus.com/inward/record.url?scp=85030752139&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85030752139&partnerID=8YFLogxK

U2 - 10.1016/j.rie.2017.09.003

DO - 10.1016/j.rie.2017.09.003

M3 - Article

AN - SCOPUS:85030752139

VL - 71

SP - 784

EP - 797

JO - Research in Economics

JF - Research in Economics

SN - 1090-9443

IS - 4

ER -