Working papers


Abstract: How does the heterogeneity of firms in terms of their price rigidity affect the effectiveness of monetary policy in a sticky price model? To answer this question, I build a New Keynesian model for a single-sector economy in which firms simultaneously face three price-setting frictions - a price-review (information) cost, a cost of price adjustment and a Calvo-style probability of costless adjustment - all calibrated separately for smaller and larger firms. The UK dataset by the Confederation of British Industry used in this research is granular confidential firm-level data linking firms' prices to their size, which makes it possible to investigate the less-explored role of the size-based variation of price rigidity. Importantly, I design price rigidity not only with the cost of price adjustment and a Calvo-style probability - the frictions explored in the related literature - but also with the price review cost - the empirically grounded friction. The central result is that in sharp contrast to consensus in literature the size-based heterogeneity of price rigidity calibrated to match data generates essentially no amplification. The thorough investigation of the model reveals that it's the certain aspects of how I model price rigidity which hamper the formation of the high amplification factor in this research. The findings of this research caution against the presumption, increasingly common, that adding firm-level heterogeneity to a sticky-price model will mechanically strengthen the real effects of monetary policy. How price-setting frictions are designed matters as much as the degree of heterogeneity itself. 


Abstract: We study whether firms in medium-scale New Keynesian models would voluntarily satisfy demand at their posted prices, or whether nominal rigidities may push prices below marginal costs. In the Altig et al (2011) framework, which features full indexation of non-adjusting prices and wages to steady-state inflation and near constant returns to scale at the firm level, we find that violations of firms’ willingness-to-supply condition are negligible: fewer than one percent of firms are ever constrained, and the associated output losses are tiny. Two features of the model drive this result: marginal costs that are nearly unresponsive to output, and prices that adjust more frequently than wages. When the short-run marginal-cost schedule is sufficiently steep, willingness-to-supply violations become quantitatively relevant. Our findings thus characterize the conditions under which the standard demand-determination assumption is a reliable approximation and those under which it may not be. 


Abstract: This paper estimates the structural parameters of price rigidity at a firm-level for the sample of UK firms. Two types of state-dependent price stickiness are considered, one at a time. At first, price-setting frictions are defined in the form of menu cost, while later they are modelled as a consequence of price observation cost, instead. For getting the structural estimates of price rigidity, I start with building a New-Keynesian model with multi-product firms, where firms are bound to pay either menu or price observation cost when they want to reoptimize their prices. Then, I use the method of simulated moments to get the structural estimates for each firm in the data sample. The median estimate of the total payments of menu costs as a share of firm’s revenue is 0.04%, while 0.15% is the corresponding estimate in the case of price observation cost. The distribution of price-setting costs across the firms is L-shaped, meaning that most firms are characterized by none or very low extent of price stickiness. The number of firms representing larger degrees of price rigidity drops sharply. Smaller firms and firms that do not export their production are found to be more price-constrained compared to larger firms and exporting firms. The findings of this paper could benefit the development of theoretical models with state-dependent pricing, in which firms are heterogeneous in terms of their degree of price rigidity.

Updated Results (simultaneous estimation of both parameters)