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Estimation of Adjustment Costs in a Model of State-Dependent PricingBy Jonathan Willis |
Abstract This paper provides a framework for direct analysis of the underlying price adjustment
costs in an industry. A dynamic programming problem is specified for monopolistically
competitive firms that face idiosyncratic costs of price adjustment. A numerical solution
is calculated using value function iteration. I estimate the structural parameters of the
model using data on magazine cover prices. Among the parameters estimated are the mean,
variance, and persistence of the adjustment cost process. The estimated distribution of
adjustment costs is nondegenerate, and the average adjustment cost paid by firms is large
in comparison to other results in the literature. Jonathan L.Willis is an economist at the Federal Reserve Bank of Kansas City. This paper is a revised version of the second chapter of his Ph.D. dissertation. He would like to thank Russell Cooper, Simon Gilchrist, John Leahy, and Chris House for their valuable comments. The views expressed herein are solely those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.Willis E-mail: jonathan.willis@kc.frb.orgBack to top RWP home |