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Price Setting and Inflation Expectations in a Low Inflation Environment

Paper Session

Friday, Jan. 7, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: American Economic Association
  • Chair: Raphael Schoenle, Brandeis University and Federal Reserve Bank of Cleveland

Tax Thy Neighbour: Corporate Tax Pass-through into Downstream Retail Prices in a Monetary Union

Luca Dedola
,
European Central Bank
Chiara Osbat
,
European Central Bank
Timo Reinelt
,
University of Mannheim

Abstract

We estimate the response of good-level retail prices to changes in corporate tax rates
(pass-through) to wholesale producers. Under perfect competition in goods and factor
markets, pass-through should be zero. We use variation in corporate tax rates across
time and space in Germany, where corporate tax rates are set at the municipality level
once a year. Between 2013 and 2017, every year about 14% of all municipalities have
changed their local tax rate. We leverage this fine-grained local variation in tax rates to
provide estimates of pass-through that control for macroeconomic conditions. We find
that the pass-through of local corporate taxes to retail prices of goods exported and
sold in other locations is about 50%. Namely, a 1 percentage point increase in corporate
taxes results in a 0.5% increase in the retail prices of goods produced by firms bearing
the local tax, and exported to other locations in the German currency area.

Measuring Price Selection in Microdata: It's Not There

Peter Karadi
,
European Central Bank
Raphael Schoenle
,
Brandeis University and Federal Reserve Bank of Cleveland
Jesse Wursten
,
KU Leuven

Abstract

We use microdata to estimate the strength of price selection -- a key metric for the effect of monetary policy on the real economy. We propose a product-level proxy for mispricing and assess whether products with larger mispricing respond with a higher probability to identified monetary and credit shocks. We find that they are not, suggesting selection is absent. Instead, we detect state-dependent adjustment on the gross extensive margin. Our results are broadly consistent with second-generation state-dependent pricing models and sizable effects of monetary policy on the real economy.

New Facts on Consumer Price Rigidity in the Euro Area

Erwan Gautier
,
Bank of France
Cristina Conflitti
,
Bank of Italy
Riember Faber
,
Erasmus University-Rotterdam
Brian Fabo
,
National Bank of Slovakia
Ludmila Fadejeva
,
Bank of Latvia
Valentin Jouvanceau
,
Bank of Lithuania
Jan-Oliver Menz
,
Deutsche Bundesbank
Teresa Messner
,
Austrian National Bank
Pavlos Petroulas
,
Bank of Greece
Pau Roldan-Blanco
,
Bank of Spain
Fabio Rumler
,
Austrian National Bank
Sergio Santoro
,
European Central Bank
Elisabeth Wieland
,
Deutsche Bundesbank
Hélène Zimmer
,
National Bank of Belgium

Abstract

Using detailed CPI micro price data for 11 euro-area countries covering 90% of euro-area GDP and about 60% of the euro area consumption basket, we document new findings on consumer price rigidity in the euro area: (i) each month 12% of prices are changed, which compares to 20% in the United States— when we exclude sales, however, the fraction of prices modified each month is about 9% in the euro area versus 10% in the United States; (ii) differences in price rigidity are very small across countries but much larger across sectors; (iii) the frequencies of price increases and decreases contribute a lot to inflation variations and to the reaction of inflation to various shocks; (iv) sales play a minor role in the transmission of shocks to prices; and (v) the low inflation period is associated with less frequent price increases.

Household Inflation Expectations and Fiscal Policy

Olivier Coibion
,
University of Texas-Austin
Yuriy Gorodnichenko
,
University of California-Berkeley
Michael Weber
,
University of Chicago

Abstract

Rising government debt levels around the world are raising the specter that authorities might seek to inflate away the debt. In theoretical settings where fiscal policy “dominates” monetary policy, higher debt without offsetting changes in primary surpluses should lead households to anticipate this higher inflation. Are household inflation expectations sensitive to fiscal considerations in practice? We field a large randomized control trial on U.S. households to address this question by providing randomly chosen subsets of households with information treatments about the fiscal outlook and then observing how they revise their expectations about future inflation as well as taxes and government spending. We find that information about the current debt or deficit levels has little impact on inflation expectations but that news about future debt leads them to anticipate higher inflation, both in the short run and long run. News about rising debt also induces households to anticipate rising spending and a higher rate of interest for government debt.
Discussant(s)
Gee Hee Hong
,
International Monetary Fund
David Berger
,
Duke University
David Argente
,
Pennsylvania State University
Philippe Andrade
,
Federal Reserve Bank of Boston
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit