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

  • Carlsson, Mikael


    (Sveriges Riksbank)

  • Nordström Skans, Oskar


    (IFAU - Institute for Labour Market Policy Evaluation)

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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Paper provided by IFAU - Institute for Evaluation of Labour Market and Education Policy in its series Working Paper Series with number 2011:8.

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Length: 36 pages
Date of creation: 06 Apr 2011
Date of revision:
Publication status: Published as Carlsson, Mikael and Oskar Nordström Skans, 'Evaluating microfoundations for aggregate price rigidities: evidence from matched firm-level data on product prices and unit labor cost' in American Economic Review, 2012, pages 1571-1595.
Handle: RePEc:hhs:ifauwp:2011_008
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