Articles | Winter 2009 PRICE ADJUSTMENT LAGS: EVIDENCE FROM FIRM-LEVEL DATA* (original) (raw)

Why are some prices stickier than others? Firm-data evidence on price adjustment lags

Infrequent price changes at the …rm level are now well documented in the literature. However, a number of issues remain partly unaddressed. This paper contributes to the literature on price stickiness by investigating the lags of price adjustments to di¤erent types of shocks. We …nd that adjustment lags to cost and demand shocks vary with …rm characteristics, namely the …rm's cost structure, the type of pricing policy, and the type of good. We also document that …rms react asymmetrically to demand and cost shocks, as well as to positive and negative shocks, and that the degree and direction of the asymmetry varies across …rms. JEL classi…cation codes: C41, D40, E31. Niemann and Pedro Portugal for helpful discussions and useful suggestions. The opinions expressed in this paper are those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem. Any errors and omissions are the sole responsibility of the authors.

Price stickiness in models: New interpretations of old results

Journal of Monetary Economics, 2007

What is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks? The answer to this question ranges from a one-to-onelink (Calvo, 1983) to no connection whatsoever (Caplin and Spulber, 1987). The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we propose new interpretations of key results in this area, which in turn suggest the kind of Ss model that is likely to generate substantial price rigidity. The first result we revisit is Caplin and Spulber's monetary neutrality model. We show that when price stickiness is measured in terms of the impulse response function, this result is not a consequence of aggregation, but is due instead to the absence of price-stickiness at the microeconomic level. We also show that the "selection effect," according to which units that adjust their prices are those that benefit the most, is neither necessary nor sufficient to account for the higher aggregate flexibility of Ss-type models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate price response. The aggregate price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.

Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks

Frontiers in Macroeconomics, 2006

There is ample evidence that the frequency of price adjustments differs substantially across sectors. This paper introduces sectoral heterogeneity in price stickiness into an otherwise standard sticky price model to study how it affects the dynamics of monetary economies. Qualitative and quantitative results from a realistic calibration for the U.S. economy show that monetary shocks tend to have larger and more persistent real effects in heterogeneous economies, when compared to identical-firms economies with similar degrees of nominal and real rigidity. In the presence of strategic complementarities in price setting, sectors with lower frequencies of price adjustment have a disproportionate effect on the aggregate price level. In order to better approximate the dynamics of the calibrated heterogeneous economy, an identical-firms model requires a frequency of price changes that is up to three times lower than the average of the heterogeneous economy. * I would like to thank

Is Sticky Price Adjustment Important for Output Fluctuations

The paper finds that shocks which have no contemporaneous effect on the price level explain almost all the variance of aggregate output in the short run. Similar results are obtained with sectoral and industry-level data. Seasonally adjusted data and not seasonally adjusted data obtain essentially the same results. A second model identifies shocks that don't affect prices for at least two months. These shocks are significantly more important for aggregate output than shocks which affect the price level immediately or with a one-month delay. A third model finds that most of the variance of aggregate output over the business cycle is explained by shocks which have no contemporaneous effect on the price level and no long-run effect on output. This finding is interpreted as evidence to support the hypothesis that sticky price adjustment is an important factor in causing aggregate demand shocks to have real effects. Economic models in which prices adjust rapidly to clear markets will have difficulty explaining all the empirical results found in this paper.

Price stickiness in Ss models: basic properties

What is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks? Caplin and Spulber (1987) provide a stark example where the answer is "none." It is well known that by relaxing their limit assumptions some price stickiness is regained but, to our knowledge, there are no general results on this issue. In this paper we study the relation between the frequency of microeconomic adjustment and aggregate price flexibility in a generalized Ss setup. We show that for a wide class of Ss models, the aggregate price level is approximately three times as flexible as the frequency of microeconomic price adjustment. This rule of thumb carries over to the cyclical variation in aggregate flexibility: The degree of price flexibility varies three times as much as the frequency of microeconomic adjustment over the business cycle. We also show that in generalized Ss models, strategic complementarities reduce aggregate price flexibility for any given frequency of microeconomic price adjustment, but less so than in Calvo-type models.

Price Stickiness, Inflation, and

2000

The sticky-price model of aggregate fluctuations implies that countries with high trend inflation rates should exhibit less-persistent output fluctuations than countries with low trend inflation. I conduct a crosscountry analysis of output persistence and inflation that takes into account the within-country time variation in trend inflation. My results do not support the implication. The results suggest that further research is needed before models based on nominal price stickiness can offer a complete microfoundation for persistent effects of aggregate demand shocks.

Explaining cross-industry heterogeneity in price stickiness

2011

This note explains cross industry heterogeneity in the frequency of price adjustment. We use the quasi-maximum approach of Papke and Wooldridge (1996) to avoid the shortcomings of OLS regressions to analyse frequencies. We pay particular attention to the role of costs and market competition in explaining cross-industry differences. We find that prices are stickier the higher the labour cost share and the lower are competition and the intermediate input share.

Guest Editors' Preface to the Special Issue on Price and Wage Dynamics

Scandinavian Journal of Economics, 2010

The study of business cycles is divided between Keynesian (or New Keynesian) and market-clearing approaches. Yet both approaches exhibit key empirical failings. Market-clearing models require highly procyclical productivity and real wages to explain the cyclicality of consumption and hours, but these are not apparent in the data. The Keynesian models incorporate nominal and real rigidities to motivate an important impact of monetary policy shocks. At the micro level, however, wage and price changes appear too frequent and too substantial to support the nominal inertia underlying this framework. There is a glaring need for work that either alters this perceived empirical picture or alters our models to fit better with evidence. This special issue of The Scandinavian Journal of Economics is devoted to price and wage dynamics. The contributions have been chosen from a large number of submissions that have all undergone standard peer review. Four papers are concerned with price rigidity and the real effects of monetary policy. Rotemberg considers the effect on price rigidity if consumers experience regret costs when they see an unexpected price change. If firms internalize these costs, the size of price increases will be less sensitive to inflation than in models with fixed costs of changing prices, and they will be more in line with evidence on firms' price-setting. Alvarez and Burriel consider a model in which sellers face a constant probability of nominal price changes, but this probability is fully heterogeneous both across and within sectors. This heterogeneity is matched to panel data on price changes separately for the US and Europe. The authors find that models without heterogeneity in price stickiness within sectors substantially overstate the real impact of monetary shocks because a sectoral sticky-price model does not recognize the importance of substitution across the sticky and flexible price-setters in response to a shock. Mizuno, Nirei, and Watanabe investigate pricing behavior in an online marketplace where prices are observed by the second. When prices fall rapidly, there is an increase in both the frequency and the size of price changes. There is positive autocorrelation in the frequency but not in the size of price adjustment. Pricing behavior seems to be state-dependent rather than time-dependent.

Are Prices Sticky or just Backward-Looking? (Preliminary)

This paper contributes to the address of two questions emphasized in the recent literature on models of the role of monetary policy in the economy. The …rst concerns the consistency of the New Keynesian sticky price model with the high degree of persistence in in‡ation. The second concerns the possibility that perceived dierences in the behavioral relationship between in‡ation, interest rates, and real variables across time may be attributable to a switch from "passive" to "active" monetary policy after 1979. I …rst show how passive policy can have very dierent implications with respect to the persistence of in‡ation. I then estimate parameters of a fairly standard model in this class; and I …nd little evidence against the hypothesis that monetary policy has been passive over the entire period 1959-2001. Moreover, my …ndings indicate little role for price stickiness. I suggest an interpretation of the real volatility of the early 1980s somewhat dierent from the m...