Are Sticky Prices Costly? Evidence from the Stock Market

We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large and strikingly robust to a broad array of checks. These results su...

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Bibliographic Details
Published in:The American economic review 2016-01, Vol.106 (1), p.165-199
Main Authors: Gorodnichenko, Yuriy, Weber, Michael
Format: Article
Language:English
Subjects:
Costs
Economic impact
Economic policy
Estimates
Federal funding
Keynesian theory
Macroeconomics
Market economies
Microeconomics
Monetary policy
Price flexibility
Price levels
Prices
Pricing policies
Qualitative research
Return on investment
Scholarships & fellowships
Securities markets
Stock
Stock prices
Studies
Volatility
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Summary:We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large and strikingly robust to a broad array of checks. These results suggest that menu costs—broadly defined to include physical costs of price adjustment, informational frictions, etc.—are an important factor for nominal price rigidity at the micro level. We also show that our empirical results are qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models in which firms have heterogeneous price stickiness.
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.20131513