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Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm- Level Data on Product Prices and Unit Labor Cost

Author

Listed:
  • Carlsson, Mikael

    (Research Department, Central Bank of Sweden)

  • Nordström Skans, Oskar

    (Uppsala University and IZA)

Abstract

Using data on product-level prices matched to the producing firm´s unit labor cost, we reject the hypothesis of a full and immediate pass-through of marginal cost. Since we focus on idiosyncratic variation, this does not fit the predictions of the Ma´ckowiak 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 coeffients cients not significantly different from unity.

Suggested Citation

  • Carlsson, Mikael & Nordström Skans, Oskar, 2009. "Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm- Level Data on Product Prices and Unit Labor Cost," Working Paper Series 231, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0231
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    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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