Micro and Macro Cost-Price Dynamics in Normal Times and During Inflation Surges

Abstract

We develop a unified approach to studying cost-price dynamics in the cross-section of firms in order to jointly explain the time series of aggregate inflation and the frequency of price changes, both during normal times and inflation surges.A key novelty is the use of microdata on firms' prices and production costs to construct an empirical measure of price gaps-the deviation between a firm's listed and optimal price.Conditional on the path of aggregate cost shocks extracted from the data, a state-dependent pricing model with strategic complementarities accounts well for both the linear cost-price dynamics of the pre-pandemic period and the nonlinear increase in inflation and frequency of price adjustment that followed.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 9 citations exist upstream.