Firm Size, Heterogeneous Strategic Complementarities, and Real Rigidity

Takushi Kurozumi and Willem Van Zandweghe

No 25-14R, Working Papers from Federal Reserve Bank of Cleveland

Abstract: Recent research finds that only large firms exhibit strategic complementarities in price setting. Using firm survey data, we show that cost pass-through decreases significantly with firm size. To examine the implications for inflation dynamics, we develop a DSGE model that features heterogeneous complementarities across firm size. While standard DSGE models with homogeneous firms generate real rigidity in relative prices, such rigidity is much weaker in our model. Large firms that exhibit complementarities align their prices with those of small firms that more fully pass through costs. Our findings challenge the notion of strategic complementarity as a source of real rigidity.

Keywords: firm heterogeneity; pass-through; monetary non-neutrality (search for similar items in EconPapers)
JEL-codes: E31 E52 L11 (search for similar items in EconPapers)
Pages: 41
Date: 2025-06-02, Revised 2025-11-25
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-dge and nep-mon
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DOI: 10.26509/frbc-wp-202514r

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