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Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm-Level Data on Product Prices and Unit Labor Cost

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  • Mikael Carlsson
  • Oskar Nordstrom Skans

Abstract

Using matched data on product-level prices and the producing firm's unit labor cost, we find a moderate pass-through of current idiosyncratic marginal-cost changes. Also, the response does not vary across firms facing very different idiosyncratic shock variances, but identical aggregate conditions. These results do not fit the predictions of Mackowiak and Wiederholt (2009). Neither do firms react strongly to predictable marginal-cost changes, as expected from Mankiw and Reis (2002). We find that firms consider both current and expected future marginal cost when setting prices. This points toward impediments to continuous price adjustments as a key driver of monetary non-neutrality.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 4 (June)
Pages: 1571-95

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:4:p:1571-95

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Cited by:
  1. Druant, Martine & Fabiani, Silvia & Kezdi, Gabor & Lamo, Ana & Martins, Fernando & Sabbatini, Roberto, 2012. "Firms' price and wage adjustment in Europe: Survey evidence on nominal stickiness," Labour Economics, Elsevier, vol. 19(5), pages 772-782.
  2. Martine Druant & Silvia Fabiani & Gabor Kezdi & Ana Lamo & Fernando Martins & Roberto Sabbatini, 2009. "How are firms’ wages and prices linked : survey evidence in Europe," Working Paper Research 174, National Bank of Belgium.
  3. Christian Merkl, 2012. "Veldkamp, L.: Information Choice in Macroeconomics and Finance," Journal of Economics, Springer, vol. 107(1), pages 97-99, September.
  4. Konstantins Benkovskis & Ludmila Fadejeva & Krista Kalnberzina, 2011. "Price Setting Behaviour in Latvia: Econometric Evidence from CPI Microdata," Working Papers 2011/01, Latvijas Banka.
  5. Dovern, Jonas, 2013. "When are GDP forecasts updated? Evidence from a large international panel," Economics Letters, Elsevier, vol. 120(3), pages 521-524.
  6. Tim Willems, 2013. "Actively Learning by Pricing: A Model of an Experimenting Seller," Economics Series Working Papers 687, University of Oxford, Department of Economics.

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