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Formal sector price discoveries: preliminary results from a developing country

  • Choudhary, M. Ali
  • Naeem, Saima
  • Faheem, Abdul
  • Hanif, Nadim
  • Pasha, Farooq

We present preliminary results of 1086 structured interviews about price setting behavior of the formal firms in the manufacturing and services sector of Pakistan. Our key discoveries are that frequency of price change is considerably high in Pakistan, lowering the real impact of monetary policy. Price rigidity is explained mainly by firms caring about relative prices and the persistence of a given shock. The exchange rate and cost shocks are more important than financial and demand shocks for both setting prices and also the readiness with which these pass-through to the economy. Large firms change prices more frequently compared to smaller firms. Formal sector firms, especially medium sized firms, interact more with informal sector firms through the demand and supply channels. Formal firms highly connected with the informal sector have lower frequency of price changes. Formal sector firms hold lack of taxes and compliance with tax regime, i.e. enforcement, as the main reasons for the existence of the informal sector.

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File URL: http://mpra.ub.uni-muenchen.de/32368/1/MPRA_paper_32368.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32368.

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Date of creation: 18 Jul 2011
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Handle: RePEc:pra:mprapa:32368
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  1. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730, March.
  2. Frankel, Jeffrey A., 2011. "Monetary Policy in Emerging Markets: A Survey," Scholarly Articles 4669671, Harvard Kennedy School of Government.
  3. 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.
  4. Wasim Shahid Malik & Ahsan ul HaqSatti & Ghulam Saghir, 2010. "Price Setting Behaviour of Pakistani Firms : Evidence from Four Industrial Cities of Punjab," Macroeconomics Working Papers 23069, East Asian Bureau of Economic Research.
  5. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  6. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
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