Belief-Dependent Pricing Decisions

This paper studies the effects of inflation and idiosyncratic cost expectations on firms’ price-adjusting decisions. Evidence of price-settings frictions using micro data has been studied through the lens of both time-dependent and state-dependent models. Using data from a unique survey, we argue that price-adjustment decisions are also belief-dependent. While controlling for time- and state-dependent factors, we find that, for the extensive margin of price-changes, expectations of inflation do not play any role, but firms’ beliefs about their overall costs do. The expectation channel is, however, heterogeneous across firms, driven exclusively by large companies, and operates with a delay. Nonetheless, when looking at firms’ beliefs about the intensive margin of price-changes, besides costs, the relevance of current inflation expectations is recovered. Our evidence supports the presence of price rigidities at the firm level but is also consistent with theories of limited attention.