The Price-setting Behavior of Korean Firms: Survey Evidence (in Korean)

Woong Kim () and Seung Je Hong ()
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Woong Kim: Economic Research Institute, The Bank of Korea
Seung Je Hong: Economic Research Institute, The Bank of Korea

Economic Analysis (Quarterly), 2009, vol. 15, issue 4, 33-81

Abstract: Most central banks use econometric models to analyze the effects of monetary policy. Usually, they assume price stickiness in their models. Thus, it is necessary to minimize parameter uncertainty by examining price-setting behaviors of firms more precisely. Reflecting the importance of price stickiness for the monetary transmission mechanism, central banks such as FRB, BOJ, BOE, etc investigate how the price-setting behaviors of firms have been changing and take account of it in their econometric models. In this context, the survey for Korean companies was conducted by using stratified random sampling. Our main results are as follows. (1) The share of firms following a time-dependent pricing rule is larger than that of firms following a state-dependent pricing rule. (2) Concerning the frequency of price adjustments, most firms change their price only once a year. (3) As the most important factor explaining price stickiness, firms respond 'implicit contracts'. (4) In the case of demand shocks, the reaction of prices adjustment is not asymmetrical. But, in the case of cost and exchange rate shocks, more firms react more quickly to increasing shocks than to decreasing shocks. (5) The average time lag between a macro shock and the price adjustment is three to eight months. (6) When setting prices, firms show both backward-looking and forward-looking price-setting behavior. (7) Most firms follow the standard mark-up rules according to the profit maximization. We find evidences that the degree of price stickiness is relatively stronger and the time-dependent pricing rules are much more widespread. The survey evidences suggest that real effects of monetary policy can be stronger than other countries.

Keywords: Price Stickiness; Price-setting behavior; Survey; Monetary Policy (search for similar items in EconPapers)
JEL-codes: D40 E31 L11 (search for similar items in EconPapers)
Date: 2009
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