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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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  • Carlsson, Mikael

    ()
    (Sveriges Riksbank)

  • Nordström Skans, Oskar

    ()
    (IFAU - Institute for Labour Market Policy Evaluation)

Abstract

Using data on product-level prices matched to the producing firm's unit labor cost, we reject the hyptothesis of a full and immediate pass-through of marginal cost. Since we focus on idiosyncratic variation, this does not fit the predictions of the Makowiak and Wiederholt (2009) version of the Rational inattention model. Neither do we find that firms react strongly to predictable marginal cost changes, as expected from the Mankiw and Reis (2002) Sticky information model. We find that, in line with Staggered contracts models, firms consider both the current and future expected marginal cost when setting prices with a sum of coefficients not significantly different from unity.

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Bibliographic Info

Paper provided by IFAU - Institute for Evaluation of Labour Market and Education Policy in its series Working Paper Series with number 2011:8.

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Length: 36 pages
Date of creation: 06 Apr 2011
Date of revision:
Publication status: Published as Carlsson, Mikael and Oskar Nordström Skans, 'Evaluating microfoundations for aggregate price rigidities: evidence from matched firm-level data on product prices and unit labor cost' in American Economic Review, 2012, pages 1571-1595.
Handle: RePEc:hhs:ifauwp:2011_008

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Keywords: Price setting; business cycles; information; micro data;

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Cited by:
  1. Benkovskis, Konstantins & Fadejeva, Ludmila & Kalnberzina, Krista, 2012. "Price setting behaviour in Latvia: Econometric evidence from CPI micro data," Economic Modelling, Elsevier, vol. 29(6), pages 2115-2124.
  2. Dovern, Jonas, 2013. "When are GDP forecasts updated? Evidence from a large international panel," Economics Letters, Elsevier, vol. 120(3), pages 521-524.
  3. Tim Willems, 2013. "Actively Learning by Pricing: A Model of an Experimenting Seller," Economics Series Working Papers 687, University of Oxford, Department of Economics.
  4. Martine Druant & Silvia Fabiani & Gábor Kézdi & Ana Lamo & Fernando Martins & Roberto Sabbatini, 2012. "How are firms’ wages and prices linked: survey evidence in Europe," MNB Occasional Papers 2012/102, Magyar Nemzeti Bank (the central bank of Hungary).
  5. 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.
  6. Christian Merkl, 2012. "Veldkamp, L.: Information Choice in Macroeconomics and Finance," Journal of Economics, Springer, vol. 107(1), pages 97-99, September.

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