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American Economic Review: Vol. 102 No. 4 (June 2012)

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Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm-Level Data on Product Prices and Unit Labor Cost

Article Citation

Carlsson, Mikael, and Oskar Nordström Skans. 2012. "Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm-Level Data on Product Prices and Unit Labor Cost." American Economic Review, 102(4): 1571-95.

DOI: 10.1257/aer.102.4.1571

Abstract

Using matched data on product-level prices and the producing firm's unit labor cost, we find a moderate pass-through of current idiosyncratic marginal-cost changes. Also, the response does not vary across firms facing very different idiosyncratic shock variances, but identical aggregate conditions. These results do not fit the predictions of Mackowiak and Wiederholt (2009). Neither do firms react strongly to predictable marginal-cost changes, as expected from Mankiw and Reis (2002). We find that firms consider both current and expected future marginal cost when setting prices. This points toward impediments to continuous price adjustments as a key driver of monetary non-neutrality.

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Authors

Carlsson, Mikael (Sveriges Riksbank)
Skans, Oskar Nordström (IFAU, Uppsala and IZA, Bonn)

JEL Classifications

D24: Production; Cost; Capital, Total Factor, and Multifactor Productivity; Capacity
D86: Economics of Contract: Theory
E12: General Aggregative Models: Keynes; Keynesian; Post-Keynesian
E32: Business Fluctuations; Cycles
E52: Monetary Policy
L11: Production, Pricing, and Market Structure; Size Distribution of Firms


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