Price setting in turbulent times
This price setting survey among Icelandic firms aims to make two contributions to the literature. First, it studies price setting in an advanced economy within a more turbulent macroeconomic environment than has previously been done. The results indicate that price adjustments are to a larger extent driven by exchange rate fluctuations than in most other advanced countries. The median Icelandic firm reviews its prices every four months and changes them every six months. The main sources of price rigidity and the most commonly used price setting methods are the same as in most other countries. A second contribution to the literature is our analysis of the nexus between price setting and exchange rate movements, a topic that has attracted surprisingly limited attention in this survey-based literature. A novel aspect of our approach is to base our analysis on a categorisation of firms in the domestic market by their direct exposure to exchange rate movements captured by imported input costs as a share of total production costs. More exposed firms are found to be more likely to use state-dependent pricing, to adjust their prices in response to exchange rate changes, and to rely on increasing prices rather than decreasing costs to restore profit margins after an exchange rate depreciation. They also review their prices more often but nevertheless, surprisingly, have the same price change frequency as the median firm. On the other hand, price review frequency declines and time-dependent pricing increases as domestic labour costs rise relative to total production costs. The results provide important insight into inflation dynamics due to an interaction between high and asymmetric exchange rate pass-through and price indexation. This interaction causes an exchange rate depreciation to spread to sectors less exposed to such changes through the use of price indexation. Exchange rate pass-through, price indexation and backward-looking behaviour in price setting therefore pose challenges for monetary policy in Iceland.
|Date of creation:||Jul 2011|
|Contact details of provider:|| Postal: Kalkofnsvegi 1, 150 Reykjavik|
Web page: http://www.sedlabanki.is/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Taylor, John B, 1980.
"Aggregate Dynamics and Staggered Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 88(1), pages 1-23, February.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Alan S. Blinder, 1994. "On Sticky Prices: Academic Theories Meet the Real World," NBER Chapters, in: Monetary Policy, pages 117-154 National Bureau of Economic Research, Inc.
- Stahl, Harald, 2005.
"Price setting in German manufacturing: new evidence from new survey data,"
Discussion Paper Series 1: Economic Studies
2005,43, Deutsche Bundesbank, Research Centre.
- Stahl, Harald, 2005. "Price setting in German manufacturing: new evidence from new survey data," Working Paper Series 0561, European Central Bank.
- Saygin Sahinoz & Bedriye Saracoglu, 2008.
"Price Setting Behavior in Turkish Industries: Evidence From Survey Data,"
2008/3, Turkish Economic Association.
- Saygın ŞAHİNÖZ & Bedr&idot;ye SARAÇOĞLU, 2008. "Price-Setting Behavior In Turkish Industries: Evidence From Survey Data," The Developing Economies, Institute of Developing Economies, vol. 46(4), pages 363-385.
- Mihai Copaciu & Florian Neagu & Horia Braun-Erdei, 2010. "Survey evidence on price-setting patterns of Romanian firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(2-3), pages 235-247.
- Ágeir Daníelsson & Lúdvík Elíasson & Magnús F. Gudmundsson & Björn A. Hauksson & Ragnhildur Jónsdóttir & Thorvardur Tjörvi Ólafsson & Thórarinn G. Pétursson, 2006.
"QMM A Quarterly Macroeconomic Model of the Icelandic Economy,"
wp32, Department of Economics, Central bank of Iceland.
- Ásgeir Daníelsson & Magnús F. Gudmundsson & Svava J. Haraldsdóttir & Thorvardur T. Ólafsson & Ásgerdur Ó. Pétursdóttir & Thórarinn G. Pétursson & Rósa Sveinsdóttir, 2009. "QMM. A Quarterly Macroeconomic Model of the Icelandic Economy," Economics wp41, Department of Economics, Central bank of Iceland.
- Ásgeir Daníelsson & Bjarni G. Einarsson & Magnús F. Guðmundsson & Svava J. Haraldsdóttir & Thórarinn G. Pétursson & Signý Sigmundardóttir & Jósef Sigurðarson & Rósa Sveinsdóttir, 2015. "QMM - A Quarterly Macroeconomic Model of the Icelandic Economy," Economics wp71, Department of Economics, Central bank of Iceland.
- Klenow, Peter J. & Malin, Benjamin A., 2010.
"Microeconomic Evidence on Price-Setting,"
Handbook of Monetary Economics,
in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284
- Apel, Mikael & Friberg, Richard & Hallsten, Kerstin, 2005.
"Microfoundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 37(2), pages 313-338, April.
- Apel, Mikael & Friberg, Richard & Hallsten, Kerstin, 2001. "Micro Foundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms," Working Paper Series 128, Sveriges Riksbank (Central Bank of Sweden).
- Silvia Fabiani & Angela Gattulli & Roberto Sabbatini, 2004.
"The pricing behaviour of Italian firms: new survey evidence on price stickiness,"
Temi di discussione (Economic working papers)
515, Bank of Italy, Economic Research and International Relations Area.
- Fabiani, Silvia & Gattulli, Angela & Sabbatini, Roberto, 2004. "The pricing behaviour of Italian firms: new survey evidence on price stickiness," Working Paper Series 0333, European Central Bank.
- N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
- Fuhrer, Jeffrey, 2006.
"Intrinsic and Inherited Inflation Persistence,"
805, University Library of Munich, Germany.
- Miles Parker, 2014. "Price-setting behaviour in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2014/04, Reserve Bank of New Zealand.
- Keeney, Mary J. & Lawless, Martina & Murphy, Alan, 2010. "How Do Firms Set Prices? Survey Evidence from Ireland," Research Technical Papers 7/RT/10, Central Bank of Ireland.
- Eytan Sheshinski & Yoram Weiss, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 44(2), pages 287-303.
- Ben Hunt, 2006. "Simple efficient policy rules and inflation control in Iceland," Economics wp30_benhunt, Department of Economics, Central bank of Iceland.
- Aurelijus Dabušinskas & Martti Randveer, 2006. "Comparison of pricing behaviour of firms in the euro area and Estonia," Bank of Estonia Working Papers 2006-08, Bank of Estonia, revised 10 Dec 2006.
- David Amirault & Carolyn Kwan & Gordon Wilkinson, 2006. "Survey of Price-Setting Behaviour of Canadian Companies," Staff Working Papers 06-35, Bank of Canada.
- Fabiani, Silvia & Loupias, Claire & Martins, Fernando & Sabbatini, Roberto (ed.), 2007. "Pricing Decisions in the Euro Area: How Firms Set Prices and Why," OUP Catalogue, Oxford University Press, number 9780195309287.
- Ali Choudhary & Thorlakur Karlsson & Gylfi Zoega, 2009.
"Survey Evidence on Customer Markets,"
Birkbeck Working Papers in Economics and Finance
0916, Birkbeck, Department of Economics, Mathematics & Statistics.
- Simon Hall & Mark Walsh & Anthony Yates, 1997. "How do UK companies set prices?," Bank of England working papers 67, Bank of England.
- Hall, Simon & Walsh, Mark & Yates, Anthony, 2000. "Are UK Companies' Prices Sticky?," Oxford Economic Papers, Oxford University Press, vol. 52(3), pages 425-446, July.
- Filippo Altissimo & Michael Ehrmann & Frank Smets, 2006. "Inflation persistence and price-setting behaviour in the euro area – a summary of the IPN evidence," Occasional Paper Series 46, European Central Bank.
- Valdimar Sigurdsson & Nils Magne Larsen & Didrik Gunnarsson, 2010. "The behavioural economics of neutral and upward sloping demand curves in retailing," The Service Industries Journal, Taylor & Francis Journals, vol. 31(15), pages 2543-2558, September.
- Jósef Sigurdsson & Rannveig Sigurdardottir, 2011. "Evidence of Nominal Wage Rigidity and Wage Setting from Icelandic Microdata," Economics wp55, Department of Economics, Central bank of Iceland.
- Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
When requesting a correction, please mention this item's handle: RePEc:ice:wpaper:wp54. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Central Bank of Iceland)
If references are entirely missing, you can add them using this form.