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Evaluating microfoundations for aggregate price rigidities: evidence from matched firm-level data on product prices and unit labor cost

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  • Carlsson, Mikael

    () (Sveriges Riksbank)

  • Nordström Skans, Oskar

    () (IFAU - Institute for Labour Market Policy Evaluation)

Abstract

Using data on product-level prices matched to the producing firm's unit labor cost, we reject the hyptothesis of a full and immediate pass-through of marginal cost. Since we focus on idiosyncratic variation, this does not fit the predictions of the Makowiak and Wiederholt (2009) version of the Rational inattention model. Neither do we find that firms react strongly to predictable marginal cost changes, as expected from the Mankiw and Reis (2002) Sticky information model. We find that, in line with Staggered contracts models, firms consider both the current and future expected marginal cost when setting prices with a sum of coefficients not significantly different from unity.

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  • Carlsson, Mikael & Nordström Skans, Oskar, 2011. "Evaluating microfoundations for aggregate price rigidities: evidence from matched firm-level data on product prices and unit labor cost," Working Paper Series 2011:8, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  • Handle: RePEc:hhs:ifauwp:2011_008
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    Cited by:

    1. M. Druant & S. Fabiani & Gabor Kezdi & Ana Lamo & Fernando Martins & R. Sabbatini, 2009. "How are Firms’ Wages and Prices Linked: Survey Evidence in Europe," Working Papers w200918, Banco de Portugal, Economics and Research Department.
    2. Druant, Martine & Fabiani, Silvia & Kezdi, Gabor & Lamo, Ana & Martins, Fernando & Sabbatini, Roberto, 2012. "Firms' price and wage adjustment in Europe: Survey evidence on nominal stickiness," Labour Economics, Elsevier, vol. 19(5), pages 772-782.
    3. Eijffinger, Sylvester C W & Grajales, Anderson & Uras, Rasim Burak, 2015. "Heterogeneity in Wage Setting Behavior in a New-Keynesian Model," CEPR Discussion Papers 10532, C.E.P.R. Discussion Papers.
    4. Letterie, Wilko & Nilsen, Øivind A., 2016. "Price Changes - Stickiness and Internal Coordination in Multiproduct Firms," Discussion Paper Series in Economics 21/2016, Norwegian School of Economics, Department of Economics.
    5. Carlsson, Mikael & Messina, Julián & Nordström Skans, Oskar, 2014. "Firm-level shocks and labor adjustments," Working Paper Series 2014:28, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    6. Dovern, Jonas, 2013. "When are GDP forecasts updated? Evidence from a large international panel," Economics Letters, Elsevier, vol. 120(3), pages 521-524.
    7. Carlsson, Mikael, 2014. "Selection Effects in Producer-Price Setting," Working Paper Series 2014:6, Uppsala University, Department of Economics.
    8. Benkovskis, Konstantins & Fadejeva, Ludmila & Kalnberzina, Krista, 2012. "Price setting behaviour in Latvia: Econometric evidence from CPI micro data," Economic Modelling, Elsevier, vol. 29(6), pages 2115-2124.
    9. Christian Merkl, 2012. "Veldkamp, L.: Information Choice in Macroeconomics and Finance," Journal of Economics, Springer, vol. 107(1), pages 97-99, September.
    10. repec:wly:econjl:v:127:y:2017:i:604:p:2216-2239 is not listed on IDEAS
    11. Tim Willems, 2017. "Actively Learning by Pricing: A Model of an Experimenting Seller," Economic Journal, Royal Economic Society, vol. 127(604), pages 2216-2239, September.
    12. Jitka Poměnková & Svatopluk Kapounek & Roman Maršálek, 2014. "Variability of Dynamic Correlation - The Evidence of Sector-Specific Shocks in V4 Countries," Prague Economic Papers, University of Economics, Prague, vol. 2014(3), pages 371-387.

    More about this item

    Keywords

    Price setting; business cycles; information; micro data;

    JEL classification:

    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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