Working Paper: NBER ID: w18860
Authors: Yuriy Gorodnichenko; Michael Weber
Abstract: We propose a simple framework to assess the costs of nominal price adjustment using stock market returns. We document that, after monetary policy announcements, the conditional volatility rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large as well as 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. We also show that our empirical results qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models where firms have heterogeneous price stickiness. Since our approach is valid for a wide variety of theoretical models and frictions preventing firms from price adjustment, we provide ``model-free'' evidence that sticky prices are indeed costly.
Keywords: Sticky Prices; Monetary Policy; Stock Market; New Keynesian Economics
JEL Codes: E2; E3; E4; E5; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher menu costs (D49) | wider fluctuations in discounted cash flows (G19) |
| price stickiness (L11) | stock return volatility (G17) |
| monetary policy surprise (E60) | stock return volatility (G17) |
| price stickiness (L11) | sensitivity of stock return volatility to monetary policy shocks (C54) |