Advanced Search
MyIDEAS: Login to save this paper or follow this series

Are Sticky Prices Costly? Evidence From The Stock Market

Contents:

Author Info

  • Yuriy Gorodnichenko
  • Michael Weber

Abstract

We propose a simple framework to assess the costs of nominal price adjustment using stock market returns. We document that, after monetary policy announcements, the conditional volatility rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large as well as strikingly robust to a broad array of checks. These results suggest that menu costs---broadly defined to include physical costs of price adjustment, informational frictions, etc.---are an important factor for nominal price rigidity. We also show that our empirical results qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models where firms have heterogeneous price stickiness. Since our approach is valid for a wide variety of theoretical models and frictions preventing firms from price adjustment, we provide ``model-free'' evidence that sticky prices are indeed costly.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w18860.pdf
Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18860.

as in new window
Length:
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:nbr:nberwo:18860

Note: AP EFG ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Refet Gurkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," Macroeconomics, EconWPA 0504013, EconWPA.
  2. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
  3. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2006. "Market-based measures of monetary policy expectations," Working Paper Series, Federal Reserve Bank of San Francisco 2006-04, Federal Reserve Bank of San Francisco.
  4. Roberto Rigobon & Brian Sack, 2001. "Measuring the Reaction of Monetary Policy to the Stock Market," NBER Working Papers 8350, National Bureau of Economic Research, Inc.
  5. Allan Zebedee & Eric Bentzen & Peter Hansen & Asger Lunde, 2008. "The Greenspan years: an analysis of the magnitude and speed of the equity market response to FOMC announcements," Financial Markets and Portfolio Management, Springer, Springer, vol. 22(1), pages 3-20, March.
  6. Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Macroeconomics, EconWPA 0402020, EconWPA.
  7. Blinder, Alan S, 1991. "Why Are Prices Sticky? Preliminary Results from an Interview Study," American Economic Review, American Economic Association, American Economic Association, vol. 81(2), pages 89-96, May.
  8. Yuriy Gorodnichenko & Johannes Wieland & Olivier Coibion, 2012. "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?," 2012 Meeting Papers, Society for Economic Dynamics 70, Society for Economic Dynamics.
  9. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," NBER Working Papers 8959, National Bureau of Economic Research, Inc.
  10. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, Elsevier, vol. 24(3), pages 331-351, November.
  11. Olivier Coibion & Yuriy Gorodnichenko, 2011. "Why are target interest rate changes so persistent?," Working Papers, Department of Economics, College of William and Mary 106, Department of Economics, College of William and Mary.
  12. Balduzzi, Pierluigi & Elton, Edwin J. & Green, T. Clifton, 2001. "Economic News and Bond Prices: Evidence from the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 36(04), pages 523-543, December.
  13. Saroj Bhattarai & Raphael Schoenle, 2010. "Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices," Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies. 1245, Princeton University, Department of Economics, Center for Economic Policy Studies..
  14. Francisco Palomino & Erica Li, 2010. "Monetary Policy Risk and the Cross-Section of Stock Returns," 2010 Meeting Papers, Society for Economic Dynamics 935, Society for Economic Dynamics.
  15. Piazzesi, Monika & Swanson, Eric T., 2008. "Futures prices as risk-adjusted forecasts of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(4), pages 677-691, May.
  16. John Haltiwanger, 1987. "Responders Versus Nonresponders: A New Perspective on Heterogeneity," UCLA Economics Working Papers, UCLA Department of Economics 436, UCLA Department of Economics.
  17. Carvalho Carlos, 2006. "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 6(3), pages 1-58, December.
  18. Ben S. Bernanke & Kenneth N. Kuttner, 2004. "What explains the stock market's reaction to Federal Reserve policy?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-16, Board of Governors of the Federal Reserve System (U.S.).
  19. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  20. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(2), pages 311-344, April.
  21. Peter J. Klenow & Jonathan L. Willis, 2006. "Sticky information and sticky prices," Research Working Paper, Federal Reserve Bank of Kansas City RWP 06-13, Federal Reserve Bank of Kansas City.
  22. Orley C. Ashenfelter & Henry Farber & Michael R Ransom, 2010. "Labor Market Monopsony," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 28(2), pages 203-210, 04.
  23. Ehrmann, Michael & Fratzscher, Marcel, 2004. "Taking stock: monetary policy transmission to equity markets," Working Paper Series, European Central Bank 0354, European Central Bank.
  24. Allen Head & Lucy Qian Liu & Guido Menzio & Randall Wright, 2011. "Sticky Prices: A New Monetarist Approach," NBER Working Papers 17520, National Bureau of Economic Research, Inc.
  25. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
  26. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1415-1464, November.
  27. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  28. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
  29. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(3), pages 523-544, June.
  30. Bomfim, Antulio N., 2003. "Pre-announcement effects, news effects, and volatility: Monetary policy and the stock market," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(1), pages 133-151, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Michael Weber, 2014. "Nominal Rigidities and Asset Pricing," 2014 Meeting Papers, Society for Economic Dynamics 53, Society for Economic Dynamics.
  2. Ozdagli, Ali K., 2013. "Not so fast: high-frequency financial data for macroeconomic event studies," Working Papers, Federal Reserve Bank of Boston 13-19, Federal Reserve Bank of Boston.
  3. Saleem Bahaj, 2014. "Systemic Sovereign Risk: Macroeconomic Implications in the Euro Area," Discussion Papers 1406, Centre for Macroeconomics (CFM).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:18860. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.