2007), “Why are Gasoline Prices Sticky? A Test of Alternative Models of Price Adjustment,” mimeo

Several macroeconomic models of business cycles rely on the assumption that \u85rms adjust prices infrequently to generate the short-run non-neutrality of money documented by the liter-ature on monetary transmission. These models posit di¤erent mechanisms to generate price stickiness, with correspondingly di¤erent implications for ination dynamics. While empiri-cal implications regarding the response to macro shocks are indistinguishable on a time series of daily price changes, the models have distinct predictions on the dynamic patterns of price adjustment. In this paper, we use daily data on wholesale gasoline prices to test three explana-tions for price stickiness: menu-costs, information processing, and strategic interactions. Using an autoregressive conditional binomial (ACB) model, we show that both the past distribution of price changes and the lagged gap have signi\u85cant explanatory power for the probability of a price change over and above the current price-cost gap. Our results have important implica-tions regarding which of the three explanations (menu-costs, information processing, or strategic interactions) best \u85ts the observed wholesale gasoline data. First, the signi\u85cant e¤ect of the historic distribution of price changes leads us to reject menu-costs as an explanation for pric