State-Dependency in Price Adjustments: Evidence from Large Shocks

Elif Feyza Özcan Kodaz and Serdar Yürek

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: In this paper, we examine firms’ price-setting decisions to identify underlying pricing behaviour and discuss their implications for aggregate inflation dynamics. By employing retail-product level micro price data from Türkiye, we first construct aggregate indicators of the average frequency and size of individual price changes. Second, we i) compare the behaviours of these indicators across low and high inflation environments, ii) utilize two large exchange rate shocks, three value-added tax (VAT) adjustments, and thirteen hikes in a sectoral cost indicator to show how firms react to large and sudden shocks. Our results indicate that firms adjust their prices more frequently during periods of high inflation and change their prices immediately after large-scale shocks. Despite the substantial variation in the frequency of price changes, there is either moderate or no movement in the size of price changes, suggesting that firms’ pricing behaviour fits perfectly into state-dependent pricing. These findings also show that pass-through of shocks to prices accelerates after large shocks and in high-inflation environments. Thus, standard models, which assume constant speed of pass-through from macroeconomic conditions to prices, may produce misleading forecasts.

Keywords: Firm behavior; Inflation; Inflation forecasting (search for similar items in EconPapers)
JEL-codes: E31 E37 L20 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-mac, nep-mon and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:2304

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