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

RePEc Short ID: ple868
ORCID iD: 0000-0002-4520-9778

Gagliardone, Luca; Gertler, Mark; Lenzu, Simone; Tielens, Joris

doi:10.59576/sr.1195

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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.

JEL Classification: E30; E31; E32; D22;

https://doi.org/10.59576/sr.1195