Are Sticky Prices Costly? Evidence From The Stock Market / Yuriy Gorodnichenko, Michael Weber.

Format:

Book

Author/Creator:

Gorodnichenko, Yuriy.

Contributor:

National Bureau of Economic Research.

Weber, Michael (Professor of finance)

Series:

Working Paper Series (National Bureau of Economic Research) no. w18860.

NBER working paper series no. w18860

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

We propose a simple framework to assess the costs of nominal price adjustment using stock market returns. We document that, after monetary policy announcements, the conditional volatility 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, etc.---are an important factor for nominal price rigidity. We also show that our empirical results qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models where firms have heterogeneous price stickiness. Since our approach 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.

Notes:

Print version record

February 2013.