Precautionary price stickiness: Bank of Spain paper

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In a Bank of Spain working paper titled Precautionary Price Stickiness, authors James Costain and Anton Nakov propose two models in which price stickiness arises endogenously even though firms are free to change their prices at zero physical cost.

"Firms are subject to idiosyncratic and aggregate shocks, and they also face a risk of making errors when they set their prices," they write.

In the first specification, firms are assumed to play a dynamic logit equilibrium, which implies that big

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