Are Sticky Prices Costly? Evidence from the Stock Market
- (pp. 165-99)
(Complimentary)
Abstract
We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large and 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 at the micro level. We also show that our empirical results are qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models in which firms have heterogeneous price stickiness. (JEL E12, E31, E43, E44, E52, G12, L11)Citation
Gorodnichenko, Yuriy, and Michael Weber. 2016. "Are Sticky Prices Costly? Evidence from the Stock Market." American Economic Review, 106 (1): 165-99. DOI: 10.1257/aer.20131513Additional Materials
JEL Classification
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- L11 Production, Pricing, and Market Structure; Size Distribution of Firms