Flexible Prices and Leverage

The frequency with which firms adjust output prices helps explain persistent differences in capital structure across firms. Unconditionally, the most exible-price firms have a 19% higher long-term leverage ratio than the most sticky-price firms, controlling for known determinants of capital structure. Sticky-price firms increased leverage more than exible-price firms following the staggered implementation of the Interstate Banking and Branching Efficiency Act across states and over time, which we use in a difference-in-differences strategy. Firms’ frequency of price adjustment did not change around the deregulation

Costly Information, Planning Complementarities and the Phillips Curve

Standard sticky information pricing models successfully capture the sluggish movement of aggregate prices in response to monetary policy shocks but fail at matching the magnitude and frequency of price changes at the micro level. This paper shows that in a setting where firms choose when to acquire costly information about different types of shocks, strategic complementarities in pricing generate planning complementarities. This results in firms optimally updating their information about monetary policy shocks less frequently than about idiosyncratic shocks. When calibrated to match frequent and large price changes observed in micro pricing data, the model is still capable of producing substantial non-neutralities. In addition, I use the model consistent Phillips curve and data from the Survey of Professional Forecasters to estimate the frequency at which firms update their information about monetary policy shocks. I find that the frequency of updating was higher in the 1970s compared to subsequent decades and hence conclude that monetary policy in the U.S. was relatively less effective prior to the 1980s