Repricing Avalanches in the Billion-Prices Data

Leal, Laura; Mateen, Haaris; Nirei, Makoto; Scheinkman, José A.

doi:10.2139/ssrn.3922510

SSRN Journal

2021

DOI: 10.2139/ssrn.3922510

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Repricing Avalanches in the Billion-Prices Data

Laura Leal¹,

Haaris Mateen²,

Makoto Nirei³

et al.

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“…In the online appendix we show the existence and uniqueness of a stationary equilibrium and characterize the equilibrium stationary distribution for this generalized model 5. This helps to explain the good fit by a GPD for several distributions of daily price changes reported by the billion prices project (Cavallo and Rigobon[24]) that is documented in Leal et al[43] 6. Of course there is no reason to expect that menu costs are independent of the rate of inflation.…”

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Repricing Avalanches

Nirei¹,

Scheinkman²

2021

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We present a menu-cost pricing model with a large but finite number n of firms. A firm's nominal price increase lowers other firms' relative prices, thereby inducing further nominal price increases. The distribution of these repricing avalanches converges as n→∞ to a mixture of Generalized Poisson Distributions (GPD), with an index of dispersion (variance/mean) that is a function of a single variable θ that is determined by the equilibrium of the continuous limit. The index of dispersion explodes as θ→1. We calibrate the model to the U.S. experience during 1988-2005 and obtain a θ surprisingly close to unity. Simulations show that a GPD fits well the distribution of avalanches but that, once we account for the dynamics, the multiplier effect derived from a firm adjusting prices by paying menu costs is even larger. We also show that the model can account for the positive relationship between inflation level and volatility that was observed in 1988-2005 in the U.S.

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Repricing Avalanches

Nirei¹,

Scheinkman²

2021

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Repricing Avalanches in the Billion-Prices Data

Cited by 1 publication

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Repricing Avalanches

Repricing Avalanches

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