Time-Varying (S, s) Band Models: Empirical Properties and Interpretation

48 Pages Posted: 14 Sep 2010

See all articles by Erwan Gautier

Erwan Gautier

Banque de France - Centre de Recherche

Hervé le Bihan

Banque de France - Centre de Recherche

Date Written: January 1, 2009

Abstract

A recent strand of empirical work uses (S, s) models with time-varying stochastic bands to describe infrequent adjustments of prices and other variables. The present paper examines some properties of this model, which encompasses most micro-founded adjustment rules rationalizing infrequent changes. We illustrate that this model is also flexible enough to fit data characterized by infrequent adjustment and variable adjustment size. We show that, to the extent that there is variability in the size of adjustments (e.g. if both small and large price changes are observed), i) a large band parameter is needed to .t the data and ii) the average band of inaction underlying the model may differ strikingly from the typical observed size of adjustment. The paper thus provides a rationalization of a recurrent empirical result: very large estimated values for the parameters measuring the band of inaction.

Keywords: (S, s) Models, Adjustment Costs, Menu Costs

JEL Classification: E31, D43, L11

Suggested Citation

Gautier, Erwan and Le Bihan, Herve, Time-Varying (S, s) Band Models: Empirical Properties and Interpretation (January 1, 2009). Banque de France Working Paper No. 231, Available at SSRN: https://ssrn.com/abstract=1676846 or http://dx.doi.org/10.2139/ssrn.1676846

Erwan Gautier (Contact Author)

Banque de France - Centre de Recherche ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France

Herve Le Bihan

Banque de France - Centre de Recherche ( email )

31 rue Croix des Petits Champs
Room 41-1391
75049 Paris Cedex 01
France

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