Why are Prices Sticky? Evidence from Business Survey Data

Abstract

This paper offers new insights on the price setting behaviour of German retail firms using a novel dataset that consists of a large panel of monthly business surveys from 1991-2006. The firm-level data allows matching changes in firms' prices to several other firm-characteristics. Moreover, information on price expectations allow analyzing the determinants of price updating. Using univariate and bivariate ordered probit specifications, empirical menu cost models are estimated relating the probability of price adjustment and price updating, respectively, to both time-and state-dependent variables. First, results suggest an important role for state-dependence; changes in the macroeconomic and institutional environment as well as firm-specific factors are significantly related to the timing of price adjustment. These findings imply that price setting models should endogenize the timing of price adjustment in order to generate realistic predictions concerning the transmission of monetary policy. Second, an analysis of price expectations yields similar results providing evidence in favour of state-dependent sticky plan models. Third, intermediate input cost changes are among the most important determinants of price adjustment suggesting that pricing models should explicitly incorporate price setting at different production stages. However, the results show that adjustment to input cost changes takes time indicating "additional stickiness" at the last stage of processing.

The Data Sets of the LMU-ifo Economics & Business Data Center – A Guide for Researchers

“…Table 3: Number of observations and enterprises in the Ifo surveys and the combined data sets "tandem"-questions (situation and expectations), which appear for various business parameters in the IBS. Schenkelberg (2011) analyses the price setting behaviour of German firms, Carstensen and Schenkelberg (2011) analyse different price setting and inflation theories with the IBS and Strasser (2012) looks at price setting behavior with respect to credit constraints. With the onset of the financial crisis in 2008, several papers appeared that deal with credit constraints, e.g.…”

“…Main topic(s) Data set(s) Abberger, Birnbrich and Seiler (2009) Respondents Special Bachmann, Elstner and Sims (2010) Economic uncertainty IVS Carstensen, Elstner and Paula (2011) Oil market, demand shocks IBS Carstensen and Schenkelberg (2011) Price setting IBS Engemann, Eck and Schnitzer (2011) Trade credits BEP Falck, Heblich and Kipar (2011) Process & product innovation INS Felbermayr, Heiland and Yalcin (2012) Export, credit constraints IBS, BEP Fidrmuc and Hainz (2009) Banking supervision IBS Kipar (2011) Bank lending, innovation INS Pesaran and Timmermann (2009) Correlations, Markov chains IBS Paula (2010) Innovation INS Rottmann and Wollmershäuser (2013) Credit crunch IBS Schenkelberg (2011) Price setting IBS Seiler (2010) Nonresponse IBS Seiler and Heumann (2012) Nonresponse, imputation IBS Stangl (2008) Economic expectations IBS Strasser (2012) Price setting IBS …”