Frequency of Price Adjustment and Pass-Through

By Gita Gopinath, Oleg Itskhoki. 2010

348 citations recorded by the source corpus.

A common finding across empirical studies of price adjustment is that there is large heterogeneity in the frequency of price adjustment. However, there is little evidence of how distant prices are from the desired flexible price. Without this evidence, it is difficult to discern what the frequency measure implies for the transmission of shocks or to understand why some firms adjust more frequently than others. We exploit the open economy environment, which provides a well-identified and sizeable cost shock namely the exchange rate shock to shed light on these questions. First, we empirically document that high frequency adjusters have a long-run pass-through that is at least twice as high as low frequency adjusters in the data. Next, we show theoretically that long-run pass-through is determined by the same primitives that shape the curvature of the profit function and, hence, also affect frequency. In an environment with variable mark-ups or variable marginal costs, theory predicts a positive relation between frequency and pass-through, as documented in the data. Consequently, estimates of long-run pass-through shed light on the determinants of the duration of prices. The standard workhorse model with constant elasticity of demand and Calvo or state dependent pricing generates long-run pass-through that is uncorrelated with frequency, contrary to the data. Lastly, we calibrate a dynamic menu-cost model and show that variable mark-ups chosen to match the variation in pass-through in the data can generate substantial variation in price duration, equivalent to one third of the observed variation in the data.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/2c3ee6e6f7499a2b47cc6918b0a73320ad897f80

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Citations in the corpus

Understanding Movements in Aggregate and Product-Level Real-Exchange Rates ∗ (2008, methodology): “…widely-used static models of international pricing with variable markups including Kimball non-CES aggregator (Kimball 1995, Klenow and Willis 2006, Gopinath and Itskhoki 2010 and 2011), distribution costs (Corsetti and Dedola 2008), and nested-CES with a finite number of products per sector…”
Importers, exporters, and exchange rate disconnect (2014, positive): “7, close to the estimates provided in Gopinath and Itskhoki (2011) using very different data and methods.”
Real Rigidities and Nominal Price Changes (2006, background): “Applications include Dotsey and King (2005), Eichenbaum and Fisher (2007), Gopinath and Itskhoki (2010), Gopinath et al. (2010) and Linde et al. (2015).”
Lost in Transit: Product Replacement Bias and Pricing to Market (2012, positive): “analyzed in GIR and Gopinath and Itskhoki (2010a), but incorporates additional features that (49)Our sample and specification differ from GIRs in the following ways. First, they focus on a sample of highincome OECD countries that have a substantial number of non-dollar priced goods, while we include”
International Shocks, Variable Markups, and Domestic Prices (2019, result): “These estimates are largely in line with the values suggested by Gopinath and Itskhoki (2011) based”
Exchange Rate Disconnect in General Equilibrium (2017, methodology): “A suitable parametric example can be found in Klenow and Willis (2006) and Gopinath and Itskhoki (2010), where h(x) = [1− log(x)] for some elasticity parameter θ > 1 and super-elasticity parameter > 0.”
Multi-Product Firms and Exchange Rate Fluctuations (2013, background): “2Examples of this recent literature include, Itskhoki, Gopinath and Rigobon (2008) who study currency choice as a determinant of pass-through, Itskhoki and Gopinath (2009) who study the relationship between the frequency of price adjustment and pass-through, and Berman, Mayer and Martin (2011) who…”
The International Price System (2015, background): “Gopinath and Rigobon (2008) and Gopinath and Itskhoki (2010a) present evidence of price stickiness of actual traded goods using import and export prices for the United States.”
Productivity and Misallocation in General Equilibrium* (2017, background): “In efficient economies, changes in allocative efficiency are zero to a first order, and so the overall effect characterized by Hulten (1978) boils down to the “pure” technology effect.”