Evaluating microfoundations for aggregate price regidities: evidence from matched firm-level data on product prices and unit labor cost

Abstract

Using data on product-level prices matched to the producing �rm�s unit labor cost, we reject the hypothesis of a full and immediate pass-through of marginal cost. Since we focus on idiosyncratic variation, this does not �t the predictions of the Ma´ckowiak and Wiederholt (2009) version of the Rational Inattention Model. Neither do we �nd that �rms react strongly to predictable marginal cost changes, as expected from the Mankiw and Reis (2002) Sticky Information Model. We �nd that, in line with Staggered Contracts models, �rms consider both the current and future expected marginal cost when setting prices with a sum of coe¢ cients not signi�cantly di¤erent from unity. JEL Classification: D8, E3, L1business cycles, Information, Micro Data, price setting