Micro and Macro Cost-Price Dynamics in Normal Times and During Inflation Surges

Luca Gagliardone, Mark Gertler, Simone Lenzu and Joris Tielens

No 33478, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study cost-price dynamics in normal times and during inflation surges. Using microdata on firms’ prices and production costs we construct an empirical measure of price gaps—the deviation between a firm’s listed and optimal price. We then examine the mapping between gaps and price changes in the cross-section of firms and derive implications for inflation dynamics in the time-series. In the microdata, pricing policies display state-dependence: firms are more likely to adjust prices as their price gap widens, a mechanism that becomes quantitatively significant when large aggregate cost shocks occur. In normal times, adjustment probabilities are approximately constant and the microdata conform with the predictions of time-dependent models (e.g., Calvo 1983). Conditional on a path of aggregate cost shocks extracted from the data, we show that a generalized state-dependent pricing model accounts well for the pre-pandemic era’s low and stable inflation and the nonlinear surge observed during the pandemic.

JEL-codes: E0 (search for similar items in EconPapers)
Date: 2025-02
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