Time-varying business volatility, price setting, and the real effects of monetary policy

Ruediger Bachmann, Benjamin Born, Steffen Elstner () and Christian Grimme

No 01/2013, Working Papers from German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung

Abstract: Does time-varying business volatility affect the price setting of firms and thus the transmission of monetary policy into the real economy? To address this question, we estimate from the firm-level micro data of the German IFO Business Climate Survey the impact of idiosyncratic volatility on the price setting behavior of firms. In a second step, we use a calibrated New Keynesian business cycle model to gauge the effects of time-varying volatility on the transmission of monetary policy to output. Our results are twofold. Heightened business volatility increases the probability of a price change, though the effect is small: the tripling of volatility during the recession of 08/09 caused the average quarterly likelihood of a price change to increase from 31.6% to 32.3%. Second, the effects of this increase in volatility on monetary policy are also small; the initial effect of a 25 basis point monetary policy shock to output declines from 0.347% to 0.341%.

Keywords: survey data; time-varying volatility; price setting; New Keynesian model; monetary policy (search for similar items in EconPapers)
JEL-codes: E30 E31 E32 E50 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (26)

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Related works:
Working Paper: Time-Varying Business Volatility, Price Setting, and the Real Effects of Monetary Policy (2013)
Working Paper: Time-Varying Business Volatility and the Price Setting of Firms (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:svrwwp:012013

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