Lunch-Seminar CIREQ-UofM 2018-2019
joint with the Département de sciences économiques, Université de Montréal
room C-6070-9 (U. of Montreal, Pavillon Lionel-Groulx, 3150 Jean-Brillant Street)
Organizer : Christopher Rauh (U. of Montreal)
Standard theories of price adjustment are based on a problem of single-product firm pricing, and therefore they are ill-suited for studying a more realistic case of firms setting prices for thousands of products. To guide new theory, we study evidence for large multi-product retailers in Israel. We find that retail stores undertake a majority of their regular price changes during occasional “peak” days, around once a month; and on a peak day, stores reprice around 15% of their products. We develop a general equilibrium model of price-setting firms with a continuum of products to assess implications of this evidence for inflation dynamics. In the model, sensitivity of inflation to monetary disturbances depends on the degree of synchronization of price changes, which rules the extent of price selection effects. Strong synchronization—simultaneous adjustment of a large fraction of prices—reduces the scope for strong selection effects. The calibrated model, despite displaying partial synchronization of price changes, generates a relatively weak monetary non-neutrality, similar in magnitude to non-neutrality in standard menu cost models. Hence, partial synchronization of price adjustments generate enough selection to prevent the occurrence of large monetary non-neutrality.