Pricing Behaviour and the Response of Hours to Productivity Shocks

48 Pages Posted: 30 May 2006

Date Written: March 2006

Abstract

Recent contributions have suggested that technology shocks have a negative impact on hours, contrary to the prediction of standard flexible-price models of the business cycle. Some authors have interpreted this finding as evidence in favour of sticky-price models, while others have either extended flexible-price models or disputed the empirical finding itself. In this paper we estimate a variety of alternative TFP measures for a representative sample of Italian manufacturing firms and on average find a negative effect of productivity shocks on hours. Using the reported frequency of price reviews, we show that the contractionary effect is stronger for firms with more flexible prices. Price stickiness remains a crucial factor in the response of hours even if product storability or market power are allowed for. Our results hold under alternative assumptions for the stationarity of hours per capita.

Keywords: Productivity shocks, price rigidity, labour input

JEL Classification: E31, E32

Suggested Citation

Marchetti, Domenico Junior and Nucci, Francesco, Pricing Behaviour and the Response of Hours to Productivity Shocks (March 2006). CEPR Discussion Paper No. 5504. Available at SSRN: https://ssrn.com/abstract=905318

Domenico Junior Marchetti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+39 6 4792 2256 (Phone)
+39 6 4792 3720 (Fax)

Francesco Nucci

University of Rome I ( email )

Piazzale Aldo Moro
Rome, 00185
Italy
+39 06 4991 0847 (Phone)
+39 06 445 3246 (Fax)

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