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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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  • Mikael Carlsson
  • Oskar Nordstrom Skans

Abstract

Using matched data on product-level prices and the producing firm's unit labor cost, we find a moderate pass-through of current idiosyncratic marginal-cost changes. Also, the response does not vary across firms facing very different idiosyncratic shock variances, but identical aggregate conditions. These results do not fit the predictions of Mackowiak and Wiederholt (2009). Neither do firms react strongly to predictable marginal-cost changes, as expected from Mankiw and Reis (2002). We find that firms consider both current and expected future marginal cost when setting prices. This points toward impediments to continuous price adjustments as a key driver of monetary non-neutrality.

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  • Mikael Carlsson & Oskar Nordstrom Skans, 2012. "Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm-Level Data on Product Prices and Unit Labor Cost," American Economic Review, American Economic Association, vol. 102(4), pages 1571-1595, June.
    • Handle: RePEc:aea:aecrev:v:102:y:2012:i:4:p:1571-95
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    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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