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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

    ()
    (Research Department, Central Bank of Sweden)

  • Nordström Skans, Oskar

    ()
    (Uppsala University and IZA)

Abstract

Using data on product-level prices matched to the producing firm´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 fit the predictions of the Ma´ckowiak 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 coeffients cients not significantly different from unity.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 231.

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Length: 41 pages
Date of creation: 01 Aug 2009
Date of revision:
Handle: RePEc:hhs:rbnkwp:0231

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Keywords: Price Setting; Business Cycles; Information; Micro Data;

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Cited by:
  1. 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).
  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. Dovern, Jonas, 2013. "When are GDP forecasts updated? Evidence from a large international panel," Economics Letters, Elsevier, vol. 120(3), pages 521-524.
  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.
  5. 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.

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