NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Benjamin Born

University of Bonn
Department of Economics
Adenauerallee 24-42
53113 Bonn
Germany

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NBER Working Papers and Publications

June 2013Time-Varying Business Volatility, Price Setting, and the Real Effects of Monetary Policy
with Ruediger Bachmann, Steffen Elstner, Christian Grimme: w19180
Does time-varying business volatility affect the price setting of firms and thus the transmission of monetary policy into the real economy? To address this question, we estimate from the firm-level micro data of the German IFO Business Climate Survey the impact of idiosyncratic volatility on the price setting behavior of firms. In a second step, we use a calibrated New Keynesian business cycle model to gauge the effects of time-varying volatility on the transmission of monetary policy to output. Our results are twofold. Heightened business volatility increases the probability of a price change, though the effect is small: the tripling of volatility during the recession of 08/09 caused the average quarterly likelihood of a price change to increase from 31.6% to 32.3%. Second, the effects of...
 
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