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Price setting in turbulent times. Survey evidence from Icelandic firms

Author

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  • Thorvardur Tjörvi Ólafsson

    (Department of Economics and Business, Aarhus University, Denmark and Central Bank of Iceland)

  • Ásgerdur Pétursdóttir

    (University of New South Wales)

  • Karen Á. Vignisdóttir

    (Central Bank of Iceland)

Abstract

This price setting survey among Icelandic firms aims to make two contributions to the literature. First, it studies price setting in an advanced economy within a more turbulent macroeconomic environment than has previously been done. The results indicate that price adjustments are to a larger extent driven by exchange rate fluctuations than in most other advanced countries. The median Icelandic firm reviews its prices every four months and changes them every six months. The main sources of price rigidity and the most commonly used price setting methods are the same as in most other countries. A second contribution to the literature is our analysis of the nexus between price setting and exchange rate movements, a topic that has attracted surprisingly limited attention in this survey-based literature. A novel aspect of our approach is to base our analysis on a categorisation of firms in the domestic market by their direct exposure to exchange rate movements captured by imported input costs as a share of total production costs. More exposed firms are found to be more likely to use state-dependent pricing, to adjust their prices in response to exchange rate changes, and to rely on increasing prices rather than decreasing costs to restore profit margins after an exchange rate depreciation. They also review their prices more often but nevertheless, surprisingly, have the same price change frequency as the median firm. On the other hand, price review frequency declines and time-dependent pricing increases as domestic labour costs rise relative to total production costs. The results provide important insight into inflation dynamics due to an interaction between high and asymmetric exchange rate pass-through and price indexation. This interaction causes an exchange rate depreciation to spread to sectors less exposed to such changes through the use of price indexation. Exchange rate pass-through, price indexation and backward-looking behaviour in price setting therefore pose challenges for monetary policy in Iceland.

Suggested Citation

  • Thorvardur Tjörvi Ólafsson & Ásgerdur Pétursdóttir & Karen Á. Vignisdóttir, "undated". "Price setting in turbulent times. Survey evidence from Icelandic firms," Economics Working Papers 2011-09, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2011-09
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Erik Eyster & Kristóf Madarász & Pascal Michaillat, 2021. "Pricing Under Fairness Concerns," Journal of the European Economic Association, European Economic Association, vol. 19(3), pages 1853-1898.
    2. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2017. "A theory of price adjustment under loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 78-95.
    3. Ahn, JaeBin & Park, Chang-Gui, 2014. "Exchange rate pass-through to domestic producer prices: Evidence from Korean firm-level pricing survey," Economics Letters, Elsevier, vol. 125(1), pages 138-142.
    4. Jósef Sigurdsson & Rannveig Sigurdardottir, 2011. "Evidence of Nominal Wage Rigidity and Wage Setting from Icelandic Microdata," Economics wp55, Department of Economics, Central bank of Iceland.
    5. Asgeir Danielsson, 2021. "Wages and prices of foreign goods in the inflationary process in Iceland," Economics wp87, Department of Economics, Central bank of Iceland.
    6. Sebastian Edwards & Luis Cabezas, 2022. "Exchange Rate Pass-Through, Monetary Policy, and Real Exchange Rates: Iceland and the 2008 Crisis," Open Economies Review, Springer, vol. 33(2), pages 197-230, April.

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    More about this item

    Keywords

    price setting; price stickiness; exchange rate pass-through; inflation dynamics;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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