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The pricing behaviour of firms in the Euro area: new survey evidence

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Author Info
Silvia Fabiani () (Banca d’Italia)
Martine Druant () (Banque Nationale de Belgique)
Ignacio Hernando () (Banco de España)
Claudia Kwapil () (Oesterreichische Nationalbank)
Bettina Landau () (European Central Bank)
Claire Loupias () (Banque de France)
Fernando Martins () (Banco de Portugal)
Thomas Mathä () (Banque centrale du Luxembourg)
Roberto Sabbatini () (Banca d'Italia)
Harald Stahl () (Deutsche Bundesbank)
Ad Stokman () (De Nederlandsche Bank)

Additional information is available for the following registered author(s):

Abstract

This study investigates the pricing behaviour of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks. Overall, more than 11,000 firms participated in the survey. The results are very robust across countries. Firms operate in monopolistically competitive markets, where prices are mostly set following mark-up rules and where price discrimination is a common practice. Our evidence suggests that both time- and state-dependent pricing strategies are applied by firms in the euro area: around one-third of the companies follow mainly time-dependent pricing rules while two-thirds use pricing rules with some element of state-dependence. Although the majority of firms take into account a wide range of information, including past and expected economic developments, about one-third adopts a purely backward-looking behaviour. The pattern of results lends support to the recent wave of estimations of hybrid versions of the New Keynesian Phillips Curve. Price stickiness arises both at the stage when firms review their prices and again when they actually change prices. The most relevant factors underlying price rigidity are customer relationships –as expressed in the theories about explicit and implicit contracts– and thus, are mainly found at the price changing (second) stage of the price adjustment process. Finally, we provide evidence that firms adjust prices asymmetrically in response to shocks, depending on the direction of the adjustment and the source of the shock: while cost shocks have a greater impact when prices have to be raised than when they have to be reduced, reductions in demand are more likely to induce a price change than increases in demand.

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Publisher Info
Paper provided by Banco de España in its series Banco de España Working Papers with number 0536.

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Length: 46 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:bde:wpaper:0536

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Related research
Keywords: price setting; nominal rigidity; real rigidity; inflation persistence; survey data;

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Find related papers by JEL classification:
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
D40 - Microeconomics - - Market Structure and Pricing - - - General

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