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Title: Pricing Behaviour and the Response of Hours to Productivity Shocks

Author(s): Domenico J. Marchetti and Francesco Nucci

Publication Date: March 2006

Keyword(s): labour input, price rigidity and productivity shocks

Programme Area(s): International Macroeconomics

Abstract: Recent contributions have suggested that technology shocks have a negative impact on hours, contrary to the prediction of standard flexible-price models of the business cycle. Some authors have interpreted this finding as evidence in favour of sticky-price models, while others have either extended flexible-price models or disputed the empirical finding itself. In this paper we estimate a variety of alternative TFP measures for a representative sample of Italian manufacturing firms and on average find a negative effect of productivity shocks on hours. Using the reported frequency of price reviews, we show that the contractionary effect is stronger for firms with more flexible prices. Price stickiness remains a crucial factor in the response of hours even if product storability or market power are allowed for. Our results hold under alternative assumptions for the stationarity of hours per capita.

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Bibliographic Reference

Marchetti, D and Nucci, F. 2006. 'Pricing Behaviour and the Response of Hours to Productivity Shocks'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5504