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Frequency of Price Adjustment and Pass-Through

  • Gita Gopinath

    (Department of Economics, Harvard University, and National Bureau of Economic Research.)

  • Oleg Itskhoki

    (Department of Economics, Princeton University.)

We empirically document, using U.S. import prices, that on average goods with a high frequency of price adjustment have a long-run pass-through that is at least twice as high as that of low-frequency adjusters. We show theoretically that this relationship should follow because variable mark-ups that reduce long-run pass-through also reduce the curvature of the profit function when expressed as a function of cost shocks, making the firm less willing to adjust its price. We quantitatively evaluate a dynamic menu-cost model and show that the variable mark-up channel can generate significant variation in frequency, equivalent to 37% of the observed variation in the data. On the other hand, the standard workhorse model with constant elasticity of demand and Calvo or state-dependent pricing has difficulty matching the facts. (c) 2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 125 (2010)
Issue (Month): 2 (May)
Pages: 675-727

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Handle: RePEc:tpr:qjecon:v:125:y:2010:i:2:p:675-727
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