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Frequency of Price Adjustment and Pass-through

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  • Gopinath, Gita
  • Itskhoki, Oleg

Abstract

We empirically document using U.S. import prices that on average goods with a high frequency of price adjustment have a long-run pass-through that is at least twice as high as that of low-frequency adjusters. We show theoretically that this relationship should follow because variable mark-ups that reduce long-run pass-through also reduces the curvature of the profit function when expressed as a function of the cost shocks, making the firm less willing to adjust its price. Lastly, we quantitatively evaluate a dynamic menu-cost model and show that the variable mark-up channel can generate significant variation in frequency, equivalent to 37% of the observed variation in the data. On the other hand the standard workhorse model with constant elasticity of demand and Calvo or state dependent pricing has difficulty matching the facts.

Suggested Citation

  • Gopinath, Gita & Itskhoki, Oleg, 2010. "Frequency of Price Adjustment and Pass-through," Scholarly Articles 30703806, Harvard University Department of Economics.
  • Handle: RePEc:hrv:faseco:30703806
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