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Time-Varying Business Volatility, Price Setting, and the Real Effects of Monetary Policy

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

Abstract

Does time-varying business volatility affect the price setting of firms and thus the transmission of monetary policy into the real economy? To address this question, we estimate from the firm-level micro data of the German IFO Business Climate Survey the impact of idiosyncratic volatility on the price setting behavior of firms. In a second step, we use a calibrated New Keynesian business cycle model to gauge the effects of time-varying volatility on the transmission of monetary policy to output. Heightened business volatility increases the probability of a price change, though the effect is small: the tripling of volatility during the recession of 08/09 caused the average quarterly likelihood of a price change to increase from 31.6% to 32.3%. Second, the effects of this increase in volatility on monetary policy are also small; the initial effect of a 25 basis point monetary policy shock to output declines from 0.347% to 0.341%.

Suggested Citation

  • Bachmann, Rüdiger & Born, Benjamin & Elstner, Steffen & Grimme, Christian, 2013. "Time-Varying Business Volatility, Price Setting, and the Real Effects of Monetary Policy," CEPR Discussion Papers 9702, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9702
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    Cited by:

    1. Balleer, Almut & Hristov, Nikolay & Menno, Dominik, 2017. "Financial Constraints and Nominal Price Rigidities," CEPR Discussion Papers 11790, C.E.P.R. Discussion Papers.
    2. Sandra Eickmeier & Norbert Metiu & Esteban Prieto, 2016. "Time-varying volatility, financial intermediation and monetary policy," CAMA Working Papers 2016-32, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Born, Benjamin & Breuer, Sebastian & Elstner, Steffen, 2014. "Uncertainty and the Great Recession," Working Papers 04/2014, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    4. Berg Tim Oliver, 2015. "Time Varying Fiscal Multipliers in Germany," Review of Economics, De Gruyter, vol. 66(1), pages 13-46, April.
    5. Berg, Tim Oliver, 2016. "Business Uncertainty and the Effectiveness of Fiscal Policy in Germany," MPRA Paper 69162, University Library of Munich, Germany.
    6. Manuel Buchholz & Lena Tonzer & J. Berner, 2016. "Asymmetric Investment Responses to Firm-specific Uncertainty," IWH Discussion Papers 7, Halle Institute for Economic Research.
    7. repec:eee:dyncon:v:83:y:2017:i:c:p:107-148 is not listed on IDEAS
    8. Isaac Baley & Julio A. Blanco, 2016. "Menu Costs, Uncertainty Cycles, and the Propagation of Nominal Shocks," Working Papers 918, Barcelona Graduate School of Economics.
    9. Christian Grimme & Christian Seiler & Klaus Wohlrabe, 2014. "Der Konflikt in der Ukraine und die Ergebnisse der ifo Unternehmensbefragungen," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 67(18), pages 46-48, September.
    10. D'Acunto, Francesco & Weber, Michael & Yang, Shuyao, 2017. "Manpower Constraints and Corporate Policies," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168109, Verein für Socialpolitik / German Economic Association.
    11. Bachmann, Rüdiger & Elstner, Steffen & Hristov, Atanas, 2017. "Surprise, surprise – Measuring firm-level investment innovations," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 107-148.
    12. repec:zbw:iwhdps:7-16 is not listed on IDEAS
    13. Buchholz, Manuel & Tonzer, Lena & Berner, Julian, 2016. "Asymmetric Investment Responses to Firm-specific Uncertainty," IWH Discussion Papers 7/2016, Halle Institute for Economic Research (IWH).
    14. Almut Balleer & Nikolay Hristov & Dominik Menno, 2017. "Financial Constraints and Nominal Price Rigidities," CESifo Working Paper Series 6309, CESifo Group Munich.
    15. Joseph S. Vavra, 2014. "Time-Varying Phillips Curves," NBER Working Papers 19790, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    monetary; New Keynesian model; price setting; survey data; time-varying volatility;

    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
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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