Frequency of Price Adjustment and Pass-Through

Gita Gopinath and Oleg Itskhoki

The Quarterly Journal of Economics, 2010, vol. 125, issue 2, 675-727

Abstract: We empirically document, using U.S. import prices, that on average goods with a high frequency of price adjustment have a long-run pass-through that is at least twice as high as that of low-frequency adjusters. We show theoretically that this relationship should follow because variable mark-ups that reduce longrun pass-through also reduce the curvature of the profit function when expressed as a function of cost shocks, making the firm less willing to adjust its price. We quantitatively evaluate a dynamic menu-cost model and show that the variable mark-up channel can generate significant variation in frequency, equivalent to 37% of the observed variation in the data. On the other hand, the standard workhorse model with constant elasticity of demand and Calvo or state-dependent pricing has difficulty matching the facts.

Date: 2010
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Working Paper: Frequency of Price Adjustment and Pass-through (2010)
Working Paper: Frequency of Price Adjustment and Pass-through (2008)
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