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Price setting & price stickiness: A developing economy perspective

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  • Choudhary, M. Ali
  • Faheem, Abdul
  • Hanif, M. Nadim
  • Naeem, Saima
  • Pasha, Farooq

Abstract

We study price setting in Pakistan using 1189 structured interviews of managers organized by the State Bank of Pakistan–Pakistan’s Central Bank. We find that on an annual basis the incidence of price adjustment is three times higher than in developed countries. The remaining price rigidity is explained by the existence of firms’ interactions with the informal sector, strategic interactions with other firms and the uncertainty about temporariness of shocks. The exchange rate and cost-push shocks matter more and are incorporated faster into prices than financial cost and demand-pull shocks. The roughly bimodal nature of price reviewing strategies together with a high frequency of price adjustment imply that monetary policy will carry low potency. Time-dependent price reviewing strategies tend to dominate state-dependent strategies, but the ratio of price reviews to actual adjustment is too high and inconsistent with the moderate levels of inflation experienced by Pakistan.

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  • Choudhary, M. Ali & Faheem, Abdul & Hanif, M. Nadim & Naeem, Saima & Pasha, Farooq, 2016. "Price setting & price stickiness: A developing economy perspective," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 44-61.
    • Handle: RePEc:eee:jmacro:v:48:y:2016:i:c:p:44-61
    DOI: 10.1016/j.jmacro.2016.01.003
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    Cited by:

    1. Muhammad Nadim Hanif & Muhammad Jahanzeb Malik & Javed Iqbal, 2016. "Intrinsic Inflation Persistence in a Developing Country," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 12, pages 19-42.
    2. Muhammad Farooq Arby & Amjad Ali, 2017. "Threshold Inflation in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 13, pages 1-19.
    3. Muhammad Nadim Hanif & Javed Iqbal & Imran Naveed Khan, 2017. "Global Commodity Prices and Domestic Inflation: A Case Study of Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 13, pages 21-51.
    4. Antonia C. Settle, 2018. "The Informal Economy as a Site of Liquidity: Pakistan's Land Market," Development and Change, International Institute of Social Studies, vol. 49(5), pages 1291-1313, September.
    5. Shahzad Ahmad & Adnan Haider, 2019. "An evaluation of the forecast performance of DSGE and VAR Models: The case of a developing country," Business Review, School of Economics and Social Sciences, IBA Karachi, vol. 14(1), pages 28-52, January-J.

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    More about this item

    Keywords

    Price stickiness; Price reviews; Survey data; Informal sector; Developing economy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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