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A Sectoral Analysis of Price-Setting Behavior in US Manufacturing Industries

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  • Campbell Leith
  • Jim Malley

Abstract

In this paper we develop a multi-sector model of firms’ pricing behaviour under imperfect competition. We allow for the fact that some goods sold will be for final consumption, while others will be used as intermediate goods in further production. We assume that price setters are constrained by the existence of Calvo (1983) contracts which enables us to measure the extent of price inertia across industrial sectors. We further allow for the possibility that some firms set prices to maximise the discounted value of profits, while others set prices according to a backward-looking rule-ofthumb. We then estimate the resulting price-setting equations for 18 US manufacturing industries defined at the SIC 2-digit level over the period 1959 to 1996. We find that there is statistically significant variability in estimates of price stickiness, ranging from 4 months to almost 1.5 years with significantly more inertia in the setting of durable goods prices. We also find that estimates of backward-looking price-setting behaviour vary, with some industries acting in a purely forward-looking manner, while others are characterized by almost 50 per cent of firms setting prices in a backwardlooking fashion. Finally we find that firms in less competitive industries (characterized by higher average markup-ups) tend to adjust prices less frequently and are less likely to do so in a forward-looking manner.

Suggested Citation

  • Campbell Leith & Jim Malley, 2003. "A Sectoral Analysis of Price-Setting Behavior in US Manufacturing Industries," CESifo Working Paper Series 984, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_984
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    1. repec:bth:wpaper:2004-03 is not listed on IDEAS
    2. Gwin, Carl R. & VanHoose, David D., 2008. "Alternative measures of marginal cost and inflation in estimations of new Keynesian inflation dynamics," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 928-940, September.
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    7. Barsky, Robert & Boehm, Christoph E. & House, Christopher L. & Kimball, Miles, 2016. "Monetary Policy and Durable Goods," Working Paper Series WP-2016-18, Federal Reserve Bank of Chicago.
    8. Syed Kanwar Abbas & Prasad Sankar Bhattacharya & Debdulal Mallick & Pasquale Sgro, 2016. "The New Keynesian Phillips Curve in a Small Open Economy: Empirical Evidence from Australia," The Economic Record, The Economic Society of Australia, vol. 92(298), pages 409-434, September.
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    21. Bozena Kaderabkova, 2016. "Development of the economic cycle on labour market in the national economy and industry of the Czech Republi," Proceedings of Business and Management Conferences 4407037, International Institute of Social and Economic Sciences.
    22. Božena Kadeřábková & Emilie Jašová, 2011. "Analýza ukazatele NAIRU na sektorové úrovni
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      ," Politická ekonomie, University of Economics, Prague, vol. 2011(4), pages 508-525.
    23. Imbs, Jean & Jondeau, Eric & Pelgrin, Florian, 2011. "Sectoral Phillips curves and the aggregate Phillips curve," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 328-344.
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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