42 Pages Posted: 6 Mar 2013 Last revised: 10 May 2017
Date Written: July 1, 2015
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: 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