Working Paper: CEPR ID: DP6504
Authors: Ariel Tomas Burstein; Christian Hellwig
Abstract: Pricing complementarities play a key role in determining the propagation of monetary disturbances in sticky price models. We propose a procedure to infer the degree of firm-level pricing complementarities in the context of a menu cost model of price adjustment using data on prices and market shares at the level of individual varieties. We then apply this procedure by calibrating our model (in which pricing complementarities are based on decreasing returns to scale at the variety level) using scanner data from a large grocery chain. Our data is consistent with moderately strong levels of firm-level pricing complementarities, but they appear too weak to generate much larger aggregate real effects from nominal shocks than a model without these pricing complementarities.
Keywords: menu costs; nominal rigidities; pricing complementarities
JEL Codes: E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pricing complementarities (D40) | propagation of monetary disturbances (E39) |
| aggregate price rises (C43) | firms' ideal prices increase (L11) |
| pricing complementarities (D40) | overall output effects from nominal shocks (E19) |
| stronger firm-level pricing complementarities (L11) | implausibly large menu costs (D24) |
| stronger firm-level pricing complementarities (L11) | excessive asymmetries between price increases and decreases (E30) |
| sensitivity of firms' profits to mispricing (L11) | more frequent price changes (E30) |
| observed magnitude of price fluctuations (E30) | larger market share fluctuations (E32) |