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Price setting & price stickiness: A developing economy perspective

Ali Choudhary, Abdul Faheem, Muhammad Hanif (), Saima Naeem and Farooq Pasha

Journal of Macroeconomics, 2016, vol. 48, issue C, 44-61

Abstract: We study price setting in Pakistan using 1189 structured interviews of managers organized by the State Bank of Pakistan–Pakistan’s Central Bank. We find that on an annual basis the incidence of price adjustment is three times higher than in developed countries. The remaining price rigidity is explained by the existence of firms’ interactions with the informal sector, strategic interactions with other firms and the uncertainty about temporariness of shocks. The exchange rate and cost-push shocks matter more and are incorporated faster into prices than financial cost and demand-pull shocks. The roughly bimodal nature of price reviewing strategies together with a high frequency of price adjustment imply that monetary policy will carry low potency. Time-dependent price reviewing strategies tend to dominate state-dependent strategies, but the ratio of price reviews to actual adjustment is too high and inconsistent with the moderate levels of inflation experienced by Pakistan.

Keywords: Price stickiness; Price reviews; Survey data; Informal sector; Developing economy (search for similar items in EconPapers)
JEL-codes: E32 E52 O11 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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DOI: 10.1016/j.jmacro.2016.01.003

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Handle: RePEc:eee:jmacro:v:48:y:2016:i:c:p:44-61