Working Paper: NBER ID: w18213
Authors: Etienne Gagnon; David López-Salido; Nicolas Vincent
Abstract: Firms employ a rich variety of pricing strategies whose implications for aggregate price dynamics often diverge. This situation poses a challenge for macroeconomists interested in bridging micro and macro price stickiness. In responding to this challenge, we note that differences in macro price stickiness across pricing mechanisms can often be traced back to price changes that are either triggered or cancelled by shocks. We exploit observed micro price behavior to quantify the importance of this margin of adjustment for the response of inflation to shocks. Across a range of empirical exercises, we find strong evidence that changes in the timing of price adjustments contribute significantly to the flexibility of the aggregate price level.
Keywords: price adjustment; inflation; macroeconomic flexibility; pricing strategies
JEL Codes: E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| timing of individual price adjustments (P22) | flexibility of the aggregate price level (E31) |
| specific shocks (e.g., devaluation of the Mexican peso, VAT hikes) (F31) | timing of price adjustments (L11) |
| timing of price adjustments (L11) | inflation response to shocks (E31) |
| extensive margin of price adjustments (L11) | aggregate inflation response (E31) |
| price pressure (D41) | likelihood of price adjustments (E30) |