NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Are Sticky Prices Costly? Evidence From The Stock Market

Yuriy Gorodnichenko, Michael Weber

NBER Working Paper No. 18860
Issued in February 2013
NBER Program(s):   AP   EFG   ME

We propose a simple framework to assess the costs of nominal price adjustment using stock market returns. We document that, after monetary policy announcements, the conditional volatility rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large as well as strikingly robust to a broad array of checks. These results suggest that menu costs---broadly defined to include physical costs of price adjustment, informational frictions, etc.---are an important factor for nominal price rigidity. We also show that our empirical results qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models where firms have heterogeneous price stickiness. Since our approach is valid for a wide variety of theoretical models and frictions preventing firms from price adjustment, we provide ``model-free'' evidence that sticky prices are indeed costly.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18860

Users who downloaded this paper also downloaded these:
Landier, Sraer, and Thesmar w18857 Banks' Exposure to Interest Rate Risk and The Transmission of Monetary Policy
Kuziemko, Norton, Saez, and Stantcheva w18865 How Elastic Are Preferences for Redistribution? Evidence from Randomized Survey Experiments
Adelino, Schoar, and Severino w18868 House Prices, Collateral and Self-Employment
Vogel, Ludwig, and Boersch-Supan w18856 Aging and Pension Reform: Extending the Retirement Age and Human Capital Formation
Bruno and Shin w18942 Capital Flows and the Risk-Taking Channel of Monetary Policy
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us