Are Sticky Prices Costly? Evidence From The Stock Market

Yuriy Gorodnichenko and Michael Weber

No 18860, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a simple framework to assess the costs of nominal price adjustment using stock market returns. We document that, after monetary policy announcements, the conditional volatility rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large as well as strikingly robust to a broad array of checks. These results suggest that menu costs---broadly defined to include physical costs of price adjustment, informational frictions, etc.---are an important factor for nominal price rigidity. We also show that our empirical results qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models where firms have heterogeneous price stickiness. Since our approach is valid for a wide variety of theoretical models and frictions preventing firms from price adjustment, we provide ``model-free'' evidence that sticky prices are indeed costly.

JEL-codes: E2 E3 E4 E5 G1 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-mac
Note: AP EFG ME
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Citations: View citations in EconPapers (23)

Published as Yuriy Gorodnichenko & Michael Weber, 2016. "Are Sticky Prices Costly? Evidence from the Stock Market," American Economic Review, American Economic Association, vol. 106(1), pages 165-99, January.

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