Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm - Level Data on Product Prices and Unit Labor Cost
Sveriges Riksbank - Research Department; Sveriges Riksbank
Oskar Nordstrom Skans
IFAU - Office of Labour Market Policy Evaluation; Institute for the Study of Labor (IZA)
August 1, 2009
Sveriges Riksbank Research Paper Series No. 62
Sveriges Riksbank Working Paper Series No. 231
Using data on product-level prices matched to the producing firm's unit labor cost, we reject the hypothesis of a full and immediate pass-through of marginal cost. Since we focus on idiosyncratic variation, this does not fit the predictions of the Mackowiak and Wiederholt (2009) version of the Rational Inattention Model. Neither do we find that firms react strongly to predictable marginal cost changes, as expected from the Mankiw and Reis (2002) Sticky Information Model. We find that, in line with Staggered Contracts models, firms consider both the current and future expected marginal cost when setting prices with a sum of coefficients not significantly different from unity.
Number of Pages in PDF File: 38
Keywords: price setting, business cycles, information, micro data
JEL Classification: D8, E3, L16working papers series
Date posted: October 12, 2009
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