2015-05: Are Sticky Prices Costly? Evidence from the Stock Market

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 as well as 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, and so on—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. Because our framework is valid for a wide variety of theoretical models and frictions preventing firms from price adjustment, we provide “model-free” evidence that sticky prices are indeed costly for firms.

Author: 
Yuriy Gorodnichenko
Michael Weber
Publication date: 
July 14, 2015
Publication type: 
2015 Working Papers

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