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Evaluating microfoundations for aggregate price regidities: evidence from matched firm-level data on product prices and unit labor cost

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  • Carlsson, Mikael
  • Nordström Skans, Oskar

Abstract

Using data on product-level prices matched to the producing �rm�s unit labor cost, we reject the hypothesis of a full and immediate pass-through of marginal cost. Since we focus on idiosyncratic variation, this does not �t the predictions of the Ma´ckowiak and Wiederholt (2009) version of the Rational Inattention Model. Neither do we �nd that �rms react strongly to predictable marginal cost changes, as expected from the Mankiw and Reis (2002) Sticky Information Model. We �nd that, in line with Staggered Contracts models, �rms consider both the current and future expected marginal cost when setting prices with a sum of coe¢ cients not signi�cantly di¤erent from unity. JEL Classification: D8, E3, L1

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Paper provided by European Central Bank in its series Working Paper Series with number 1083.

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Date of creation: Aug 2009
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Handle: RePEc:ecb:ecbwps:20091083

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Keywords: business cycles; Information; Micro Data; price setting;

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Cited by:
  1. Dovern, Jonas, 2013. "When are GDP forecasts updated? Evidence from a large international panel," Economics Letters, Elsevier, vol. 120(3), pages 521-524.
  2. Tim Willems, 2013. "Actively Learning by Pricing: A Model of an Experimenting Seller," Economics Series Working Papers 687, University of Oxford, Department of Economics.
  3. 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.
  4. 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.

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