Are Sticky Prices Costly? Evidence from the Stock Market

42 Pages Posted: 6 Mar 2013 Last revised: 10 May 2017

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Michael Weber

University of Chicago - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2015

Abstract

We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large and strikingly robust to a broad array of checks. These results suggest that menu costs - broadly defined to include physical costs of price adjustment, informational frictions, etc. - are an important factor for nominal price rigidity at the micro level. We also show that our empirical results are qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models in which firms have heterogeneous price stickiness.

Keywords: menu costs, sticky prices, asset prices

JEL Classification: E12, E31, E44, G12, G14

Suggested Citation

Gorodnichenko, Yuriy and Weber, Michael, Are Sticky Prices Costly? Evidence from the Stock Market (July 1, 2015). American Economic Review, Vol. 106, No. 1, 2016. Available at SSRN: https://ssrn.com/abstract=2228983 or http://dx.doi.org/10.2139/ssrn.2228983

Yuriy Gorodnichenko (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://www.econ.berkeley.edu/~ygorodni/index.htm

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

P.O. Box 7240
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Michael Weber

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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