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Time-varying business volatility and the price setting of firms

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  • Bachmann, Rüdiger
  • Born, Benjamin
  • Elstner, Steffen
  • Grimme, Christian

Abstract

Does time-varying business uncertainty/volatility affect the price setting of firms and in what way? We estimate from the micro data of the German ifo Business Climate Survey the impact of idiosyncratic volatility on the extensive margin of firm-level price setting behavior. Heightened uncertainty increases the probability of a price change, suggesting that, for price setting, the volatility effect dominates the “wait-and-see” effect. In a second step, we use structural vector autoregressions to estimate the effects of uncertainty on the intensive pricing margin. Higher uncertainty leads to an increase in price dispersion and to larger price adjustments.

Suggested Citation

  • Bachmann, Rüdiger & Born, Benjamin & Elstner, Steffen & Grimme, Christian, 2019. "Time-varying business volatility and the price setting of firms," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 82-99.
  • Handle: RePEc:eee:moneco:v:101:y:2019:i:c:p:82-99
    DOI: 10.1016/j.jmoneco.2018.07.013
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    More about this item

    Keywords

    Survey data; Time-varying uncertainty/volatility; Price setting; Extensive margin; Intensive margin;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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