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Price-setting and economic slack: Evidence from firm-level survey data

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  • Frohm, Erik

Abstract

Economic slack plays an important role for inflation dynamics in conventional macroeconomic models. Some have argued that this relationship, known as the Phillips curve, has broken down in recent years. However, due to the endogenous response of monetary policy, identification of the aggregate Phillips curve is fraught with uncertainty. To deal with some of these issues, this paper relies on a novel survey data set for firms in the retail trade sector in Sweden to explore the relationship between firms price-setting and firm-level measures of economic slack, namely firms’ perception of their sales situation, profitability, labor shortages and goods in stock. The results suggest that firms’ selling prices are more likely to increase if they perceive the sales situation to be good, rather than satisfactory or poor, and if they expect aggregate inflation to be rising. Firms’ assessment of their profitability, labor shortages or goods in stock are however only weakly correlated with selling prices, if at all.

Suggested Citation

  • Frohm, Erik, 2020. "Price-setting and economic slack: Evidence from firm-level survey data," Journal of Macroeconomics, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:jmacro:v:65:y:2020:i:c:s0164070420301610
    DOI: 10.1016/j.jmacro.2020.103235
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    Cited by:

    1. Frohm, Erik, 2020. "Labor shortages and wage growth," Working Paper Series 394, Sveriges Riksbank (Central Bank of Sweden).
    2. Awad, Atif & Albaity, Mohamed, 2022. "ICT and economic growth in Sub-Saharan Africa: Transmission channels and effects," Telecommunications Policy, Elsevier, vol. 46(8).

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    More about this item

    Keywords

    Price-setting; Survey data; Inflation expectations; New keynesian phillips curve;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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