Intertemporal Pass-Through

Ivan Yotzov, Boromeus Wanengkirtyo and Mishel Ghassibe

No 1524, Working Papers from Barcelona School of Economics

Abstract: Forward-looking pricing is at the core of modern macroeconomics, yet a gap remains between its theoretical foundations and their empirical validation. To bridge this gap, we study intertemporal pass-through (iPT): the sensitivity of firms' desired prices to changes in their expected future marginal costs, a micro building block of foresight in aggregate inflation. On the empirical side, we obtain direct iPT estimates by combining UK firm-level survey data with idiosyncratic news shocks from a natural experiment: the March 2019 announcement of a future tariff schedule in the event of a "No-Deal" Brexit. We find iPT to be largest among firms with the lowest frequency of price adjustment and those expecting the cost shock to arrive earlier. In addition, iPT is smaller among firms with state-dependent pricing and for larger shocks. On the theory side, we derive iPT in a model with heterogeneous adjustment frequencies and perceived shock horizons, formally reconciling our empirical findings on the drivers of iPT differences. We also use our setup to assess the general equilibrium consequences of iPT heterogeneity. In particular, we show that the sensitivity of aggregate inflation to changes in future costs is convex in non-adjustment frequencies and perceived shock horizons. As a result, iPT heterogeneity amplifies the degree of forward-lookingness of macroeconomic aggregates. Thus, announcements of future policies have contemporaneous effects, and heterogeneity in pricing decisions increase their magnitude.

Keywords: Brexit; expectations; price-setting; survey data; tariffs (search for similar items in EconPapers)
JEL-codes: C83 D25 D84 E31 (search for similar items in EconPapers)
Date: 2025-10
New Economics Papers: this item is included in nep-bec and nep-inv
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