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Why are gasoline prices sticky? A test of alternative models of price adjustment

✍ Scribed by Christopher Douglas; Ana María Herrera

Publisher
John Wiley and Sons
Year
2009
Tongue
English
Weight
932 KB
Volume
25
Category
Article
ISSN
0883-7252

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

Macroeconomic models of business cycles rely on the assumption that firms adjust prices infrequently to generate the short‐run non‐neutrality of money documented by the monetary transmission literature. They posit different mechanisms to generate price stickiness, with correspondingly different implications for inflation dynamics. Using an autoregressive conditional binomial model, we test which mechanism is most consistent with the pattern of price adjustment found in daily wholesale gasoline price data. Our results lead us to reject menu costs and information‐processing delays but suggest that strategic considerations related to the idea of ‘fair pricing’ play an important role in accounting for price stickiness. Copyright © 2009 John Wiley & Sons, Ltd.

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