Explaining Asymmetric Price Adjustment

In an in…nite horizon model with stochastic costs, moderate in‡ation, costly price adjustment, and optimal price setting, we demonstrate that individual price reductions will be larger but less frequent than price increases. With positive in‡ation, aggregate prices are more responsive to cost increases than to cost decreases, and a calibrated version of the model …ts well the magnitude of downward price stickiness observed in data. The model predicts that this individual pricing asymmetry increases in the volatility of variables that a¤ect the optimal price while aggregate price asymmetry falls.