Interindustry Linkages and the Accumulation of Price Rigidity: A Cross-Industry Evidence

Sangjin Jung
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Sangjin Jung: Hyupsung University

Korean Economic Review, 2002, vol. 18, 331-347

Abstract: New Keynesian economic has attempted to justify nominal price rigidity with the "menu cost hypothesis". However, the nature of the menu cost is vague and has not been investigated> I set up an information search model in which firms face information scarcity to set the state-contingent prices in an input-output system. This paper shows that the cost of price adjustment stems from firms information search in a complex input-output system. The model is also able to explain the differing price stickiness across industries and the observed considerable price stickiness of the final goods. This implies that price rigidity accumulates when individual prices pass through an input-output system. Therefore, the model and empirical evidence support the "cumulation hypothesis" as an explanation for nominal price rigidity.

Keywords: Interindustry linkages; information search; accumulation of price rigidity (search for similar items in EconPapers)
JEL-codes: E3 (search for similar items in EconPapers)
Date: 2002
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