Time-Varying Business Volatility and the Price Setting of Firms

Ruediger Bachmann, Benjamin Born and Christian Grimme
Authors registered in the RePEc Author Service: Steffen Elstner ()

No 9702, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Does time-varying business uncertainty/volatility affect the price setting of firms and, if so, in what way? To address this question, we estimate from the firm-level micro data of the German ifo Business Climate Survey the impact of idiosyncratic volatility on the extensive margin of the price setting behavior of firms. We find that heightened business uncertainty increases the probability of a price change, which suggests that, for price setting, the volatility effect dominates the 'wait-and-see' effect of uncertainty. In a second step, we use structural VAR models to estimate the effects of time-varying business uncertainty on the intensive pricing margin. We find that higher business uncertainty leads to both an increase in price dispersion and in the average size of absolute price changes which is mainly driven by price decreases. Taken together, our results show that higher business uncertainty causes a rise in both the extensive and intensive margins of price setting.

Keywords: Intensive margin; Extensive magin; Price setting; Survey data; Time-varying uncertainty/volatility (search for similar items in EconPapers)
JEL-codes: E30 E31 E32 (search for similar items in EconPapers)
Date: 2013-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Related works:
Journal Article: Time-varying business volatility and the price setting of firms (2019)
Working Paper: Time-varying business volatility and the price setting of firms (2019)
Working Paper: Time-Varying Business Volatility and the Price Setting of Firms (2013)
Working Paper: Time-varying business volatility, price setting, and the real effects of monetary policy (2013)
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