Price Setting in a Forward-Looking Customer Market

We propose a new explanation for price rigidity. We show that if consumers form habits in individual goods, then firms face a time- inconsistency problem. The consumers’ habits imply that low prices in the future help attract customers in the present. Firms would therefore like to promise low prices in the future. But when the future arrives they have an incentive to exploit consumers’ habits and price gouge. In this model, unlike the standard no-habit model, nominal price rigidity is an equilibrium outcome. Equilibrium price rigidity can be sustained because rigid prices help firms overcome the time-inconsistency problem. If customers have incomplete information about firms’ desired prices, the optimal policy for the firm is to commit to a “price cap”. Our model therefore provides an explanation for the simultaneous existence of a rigid regular price and frequent sales, a pattern that is difficult to reconcile with existing menu cost models or price rigidity. Our model also explains survey evidence on firms’ fears of adverse customer reactions to price changes, the fact that firms make open commitments to customers not to change their prices, the tendency of price rigidity to increase with the frequency of repeat purchases and the tendency of prices to be more rigid to existing customers than new customers.Time-inconsistency, Price Rigidity, Habit Formation, Asymmetric Information.

Measuring Firms’ R&D Effects on Technical Progress: Japan in the 199

One of the important public policy issues in science and technology is to ascertain if and how firms' investments in research and development (R&D) contribute to technical progress at firm and industry levels. Griliches (1979) made a pioneering contribution to our understanding of economic growth by pointing out that accumulation of firms' investments in R&D and creation of knowledge will lead to technical progress. In this paper we present a method based on index number theory for estimating technical progress and then apply it for estimating technical progress for Japanese manufacturing firms in the 1990s. Estimated technical progress is then used to test the above Griliches hypothesisR&D; Japan; technical progress; economic growth

COST PASS-THROUGH IN THE U.S. COFFEE INDUSTRY

A rich data set of coffee prices and costs was used to determine to what extent changes in commodity costs affect manufacturer and retail prices. On average, a 10-cent increase in the cost of a pound of green coffee beans in a given quarter results in a 2-cent increase in manufacturer and retail prices in that quarter. If a cost change persists for several quarters, it will be incorporated into manufacturer prices approximately cent-forcent with the commodity-cost change. Given the substantial fixed costs and markups involved in coffee manufacturing, this translates into about a 3-percent change in retail prices for a 10-percent change in commodity prices. We do not find robust evidence that coffee prices respond more to increases than to decreases in costs.cost pass-through, retail prices, manufacturer prices, commodity costs, coffee, Demand and Price Analysis,

Pass-Through in Retail and Wholesale

This paper studies how prices comove across products, firms and locations to gauge the relative importance of retailer versus manufacturer-level shocks in determining prices. I make use of a large panel data set on prices for a cross-section of retailers in the U.S. I analyze prices at the barcode or "Universal Product Code'' (UPC) level for individual stores. I find that only 16% of the variation in prices is common across stores selling an identical product. 65% of the price variation is common to stores within a particular retail chain (but not across retail chains), while 17% is completely idiosyncratic to the store and product. Product categories with frequent temporary "sales'' exhibit a disproportionate amount of completely idiosyncratic price variation. My results suggest that most of the observed price variation arises from retail-level rather than manufacturer-level demand and supply shocks. However, the behavior of prices is difficult to relate to observed variation in costs and demand at the retail level. This suggests that retail prices may vary largely as a consequence of dynamic pricing strategies on the part of retailers or manufacturers, rather than static demand and supply shocks.

Crises and Recoveries in an Empirical Model of Consumption Disasters

We estimate an empirical model of consumption disasters using a new panel data set on personal consumer expenditure for 24 countries and more than 100 years, and study its implications for asset prices. The model allows for permanent and transitory effects of disasters that unfold over multiple years. It also allows the timing of disasters to be correlated across countries. Our estimates imply that the average disaster reaches its trough after 6 years, with a peak-to-trough drop in consumption of about 30%, but that roughly half of this decline is reversed in a subsequent recovery. Uncertainty about consumption growth increases dramatically during disasters. Our estimated model generates a sizable equity premium from disaster risk, but one that is substantially smaller than in models in which disasters are permanent and instantaneous. It yields new predictions for the dynamics of risk-free interest rates, the term structure of interest rates, and the pricing of short-term versus long-term risky assets. The persistence of consumption declines in our model implies that a large value of the intertemporal elasticity of substitution is necessary to explain stock-market crashes at the onset of disasters.

Monetary Non-Neutrality in a Multi-Sector Menu Cost Model

Empirical evidence suggests that as much as 1/3 of the U.S. business cycle is due to nominal shocks. We calibrate a multi-sector menu cost model using new evidence on the cross-sectional distribution of the frequency and size of price changes in the U.S. economy. We augment the model to incorporate intermediate inputs. We show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non-neutrality generated by the model. We furthermore show that the introduction of intermediate inputs raises the degree of monetary non-neutrality by another factor of three, without adversely affecting the model's ability to match the large average size of price changes. Our multi-sector menu cost model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 23% of the U.S. business cycle.

Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions

We use rich historical data on military procurement spending across U.S. regions to estimate the effects of government spending in a monetary union. Aggregate military build-ups and draw- downs have differential effects across regions. We use this variation to estimate an "open economy relative multiplier" of approximately 1.5. We develop a framework for interpreting this estimate and relating it to estimates of the standard closed economy aggregate multiplier. The closed economy aggregate multiplier is highly sensitive to how strongly aggregate monetary and tax policy "leans against the wind." In contrast, our open economy relative multiplier "differences out" these effects because different regions in the union share a common monetary and tax policy. Our estimates provide evidence in favor of models in which demand shocks can have large effects on output.

Women, wealth effects, and slow recoveries

Business cycle recoveries have slowed in recent decades. This slow-down comes entirely from female employment, as women's employment rates converged toward men's during the past half-century. But does the slowdown in the growth of female employment rates translate into a slowdown for overall employment rates? We estimate the extent to which women "crowd out" men in the labor market across US states, and find that it is small. Through the lens of a general equilibrium model with home production, we show this statistic implies that 60–75 percent of the slowdown in recent business cycle recoveries can be explained by female convergence.First author draf

Five Facts About Prices: A Reevaluation of Menu Cost Models

We establish five facts about prices in the U.S. economy: 1) The median frequency of nonsale price change is 9-12% per month, roughly half of what it is including sales. This implies an uncensored median duration of regular prices of 8-11 months. Product turnover plays an important role in truncating price spells in durable goods. The median frequency of price change for finished goods producer prices is roughly 11% per month. 2) One-third of regular price changes are price decreases. 3) The frequency of price increases covaries strongly with inflation while the frequency of price decreases and the size of price increases and price decreases do not. 4) The frequency of price change is highly seasonal: It is highest in the 1st quarter and lowest in the 4th quarter. 5) The hazard function of price changes for individual consumer and producer goods is downward sloping for the first few months and then flat (except for a large spike at 12 months in consumer services and all producer prices). These facts are based on CPI microdata and a new comprehensive data set of microdata on producer prices that we construct from raw production files underlying the PPI. We show that the 1st, 2nd and 3rd facts are consistent with a benchmark menu-cost model, while the 4th and 5th facts are not

Accounting for Incomplete Pass-Through

Recent theoretical work has suggested a number of potentially important factors in causing incomplete pass-through of exchange rates to prices, including markup adjustment, local costs and barriers to price adjustment. We empirically analyze the determinants of incomplete passthrough in the coee industry. The observed pass-through in this industry replicates key features of pass-through documented in aggregate data: prices respond sluggishly and incompletely to changes in costs. We use microdata on sales and prices to uncover the role of markup adjustment, local costs, and barriers to price adjustment in determining incomplete pass-through using a structural oligopoly model that nests all three potential factors. The implied pricing model explains the main dynamic features of short and long-run pass-through. Local costs reduce long-run pass-through by a factor of 59% relative to a CES benchmark. Markup adjustment reduces pass-through by an additional factor of 33%, where the extent of markup adjustment depends on the estimated \super-elasticity" of demand. The estimated menu costs are small (0:23% of revenue) and have a negligible eect on long-run pass-through, but are quantitatively successful in explaining the delayed response of prices to costs. We nd that delayed passthrough in the coee industry occurs almost entirely at the wholesale rather than the retail level