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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.

Suggested Citation

  • 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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    More about this item

    Keywords

    Price setting; business cycles; information; micro data;
    All these keywords.

    JEL classification:

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

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