Working Paper: NBER ID: w13455
Authors: Ariel 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 complementarities.
Keywords: pricing complementarities; menu cost model; monetary disturbances; sticky prices
JEL Codes: E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm-level pricing complementarities (L11) | propagation of monetary disturbances (E39) |
| pricing complementarities (D40) | nominal shocks effects (E39) |
| aggregate price rises (C43) | firms' ideal prices increase (L11) |
| stronger pricing complementarities (D49) | large menu costs (L11) |
| stronger pricing complementarities (D49) | excessive asymmetry between price increases and decreases (E30) |
| inferred degree of pricing complementarities (D40) | large amplification effects from nominal rigidities (H31) |