Customer Anger at Price Increases, Time Variation in the Frequency of Price Changes and Monetary Policy / Julio J. Rotemberg.

By:

Rotemberg, Julio J

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w9320.Publication details: Cambridge, Mass. National Bureau of Economic Research 2002.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: While much evidence suggests tha price rigidity is due to a concern with the reaction of customers, price increases do not seem to be typically associated with drastic reduction in purchases. To explain this apparent inconsistency, this paper develops a model where consumers care about the fairness of prices and react negatively only when they become convinced that prices are unfair. This leads to price rigidity, though the implications of the model are not identical to those of existing models of costly price adjustment. In particular, the frequency of price adjustment ought to depend on economy-wide variables observed by consumers. As I show, this has implications for the effects of monetary policy. It can, in particular, explain why inflation does not fall immediately after a monetary tightening.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w9320 (Browse shelf(Opens below))	Not For Loan

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November 2002.

While much evidence suggests tha price rigidity is due to a concern with the reaction of customers, price increases do not seem to be typically associated with drastic reduction in purchases. To explain this apparent inconsistency, this paper develops a model where consumers care about the fairness of prices and react negatively only when they become convinced that prices are unfair. This leads to price rigidity, though the implications of the model are not identical to those of existing models of costly price adjustment. In particular, the frequency of price adjustment ought to depend on economy-wide variables observed by consumers. As I show, this has implications for the effects of monetary policy. It can, in particular, explain why inflation does not fall immediately after a monetary tightening.