Micro and Macro Cost-Price Dynamics in Normal Times and During Inflation Surges
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.
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Copy CitationLuca Gagliardone, Mark Gertler, Simone Lenzu, and Joris Tielens, "Micro and Macro Cost-Price Dynamics in Normal Times and During Inflation Surges," NBER Working Paper 33478 (2025), https://doi.org/10.3386/w33478.Download Citation
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