Intertemporal Pass-Through

Forward-looking pricing is at the core of modern macroeconomics, yet a gap remains between its theoretical foundations and their empirical validation. To bridge this gap, we study intertemporal pass through (iPT): the sensitivity of firms’ reset prices to changes in their expected future marginal costs, a micro building block of foresight in aggregate inflation. On the empirical side, we obtain direct iPT estimates by combining UK firm-level survey data with idiosyncratic news shocks from a natural experiment: the March 2019 announcement of a future tariff schedule in the event of a "No-Deal" Brexit. We find iPT to be largest among firms with the lowest frequency of price adjustment and those expecting the cost shock to arrive earlier. In addition, iPT is smaller among firms with state-dependent pricing and for larger shocks. On the theory side, we derive iPT in a model with heterogeneous adjustment frequencies and perceived shock horizons, formally reconciling our empirical findings on the drivers of iPT differences. We also use our setup to assess the general equilibrium consequences of iPT heterogeneity. In particular, we show that the sensitivity of aggregate inflation to changes in future costs is convex in non-adjustment frequencies and perceived shock horizons. As a result, iPT heterogeneity amplifies the degree of forward-lookingness of macroeconomic aggregates. Thus, announcements of future policies have contemporaneous effects, and heterogeneity in pricing decisions increases their magnitude.