Customer anger at price increases, changes in the frequency of price adjustment and monetary policy

While firms claim to be concerned with consumer reactions to price increases, these often do not cause large reductions in purchases. The model developed here fits this by letting consumers react negatively only when they become convinced that prices are unfair. This can explain price rigidity, thou...

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Bibliographic Details
Published in:Journal of monetary economics 2005-05, Vol.52 (4), p.829-852
Main Author: Rotemberg, Julio J.
Format: Article
Language:English
Subjects:
Consumer attitudes
Consumer behavior
Consumer behaviour
Consumers
Customer anger
Economic equilibrium
Economic impact
Mathematical models
Monetary economics
Monetary policy
Perception
Price adjustment
Price level
Price rises
Price stickiness
Price theory
Prices
Regression analysis
Sticky prices
Studies
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Summary:While firms claim to be concerned with consumer reactions to price increases, these often do not cause large reductions in purchases. The model developed here fits this by letting consumers react negatively only when they become convinced that prices are unfair. This can explain price rigidity, though its implications are not identical to those of existing models of costly price adjustment. In particular, the frequency of price adjustment can depend on economy-wide variables observed by consumers. This has implications for the effects of monetary policy and can explain why inflation does not fall immediately after a monetary tightening.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2005.03.004