NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Christian Grimme

Ifo Institute for Economic Research e.V.
at the University of Munich
Poschingerstr. 5
81679 München
Germany

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NBER Working Papers and Publications

June 2013Time-Varying Business Volatility and the Price Setting of Firms
with Ruediger Bachmann, Benjamin Born, Steffen Elstner: w19180
Does time-varying business uncertainty/volatility affect the price setting of firms and, if so, in what way? 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 extensive margin of the price setting behavior of firms. We find that heightened business uncertainty increases the probability of a price change, which suggests that, for price setting, the volatility effect dominates the “wait-and-see” effect of uncertainty. In a second step, we use structural VAR models to estimate the effects of time-varying business uncertainty on the intensive pricing margin. We find that higher business uncertainty leads to both an increase in price dispersion and in the average size of absolute price cha...
 
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