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

By Julio J. Rotemberg, Monica Bütler, V. V. Chari, Robert King For Comments and The Harvard


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

Year: 2005
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