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Belief-Dependent Pricing Decisions

Author

Listed:
  • Serafín Frache

    (Universidad de Montevideo, Facultad de Ciencias Empresariales y Economía)

  • Rodrigo Lluberas

    (Banco Central del Uruguay)

  • Javier Turen

    (Pontificia Universidad Católica de Chile)

Abstract

This paper studies the effects of inflation and idiosyncratic cost expectations on firms’ price-adjusting decisions. Evidence of price-settings frictions using micro data has been studied through the lens of both time-dependent and state-dependent models. Using data from a unique survey, we argue that priceadjustment decisions are also belief-dependent. While controlling for time- and state- ependent factors, we find that, for the extensive margin of price-changes, expectations of inflation do not play any role, but firms’ beliefs about their overall costs do. The expectation channel is, however, heterogeneous across firms, driven exclusively by large companies, and operates with a delay. Nonetheless, when looking at firms’ beliefs about the intensive margin of price-changes, besides costs, the relevance of current inflation expectations is recovered. Our evidence supports the presence of price rigidities at the firm level but is also consistent with theories of limited attention.

Suggested Citation

  • Serafín Frache & Rodrigo Lluberas & Javier Turen, 2021. "Belief-Dependent Pricing Decisions," Documentos de trabajo 2021007, Banco Central del Uruguay.
  • Handle: RePEc:bku:doctra:2021007
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    References listed on IDEAS

    as
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    Cited by:

    1. Marianna Riggi & Alex Tagliabracci, 2022. "Price rigidities, input costs, and inflation expectations: understanding firms’ pricing decisions from micro data," Questioni di Economia e Finanza (Occasional Papers) 733, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    inflation expectations; cost expectations; firm surveys; price adjustments;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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