DP18713 Firms’ Pass-Through Dynamics: A Survey Approach
This paper uses a new survey approach to empirically characterize the dynamics of pass-through at the firm level and explores them in a price-setting model. We directly elicit price pass-through of cost shocks, both in the field and in survey experiments. We find gradual pass-through dynamics due to infrequent adjustments (nominal rigidities) and high costs of deviating from competitors’ prices (micro real rigidities), especially when the shock is expected to be less persistent. The experiments provide direct causal
evidence for micro real rigidities: Firms raise prices several times in response to a permanent aggregate shock, and idiosyncratic shocks of the same size have a lower pass-through than aggregate shocks. Further, our approach enables us to compute the slope of the Phillips curve, which decreases by half once allowing for micro real rigidities. Finally, we quantify the role of real and nominal rigidities in a general equilibrium price-setting model based on our empirical results and find a substantial degree of both.