Price adjustment, pass-through and monetary policy

My thesis focuses on the question of how firms adjust prices in reponse to changing economic conditions. In the first chapter, written jointly with Jón Steinsson, I use the price microdata underlying the U.S. consumer and producer price indexes to document new facts about price adjustment in the U.S. The consumer price data set contains millions of observations on prices spanning the entire range of U.S. consumer products. We constructed a new data set on producer prices from the raw micro-data underlying the U.S. producer price index. We find that a substantial fraction of the flexibility documented by earlier studies for U.S. consumer prices is associated with transitory retail sales. We also document a substantial amount of price rigidity in producer prices. In the second chapter of my thesis, I study the pass-through of imported costs into consumer prices in the coffee industry. Pass-through has been studied extensively in international economics since it plays a key role in understanding fluctuations in the real exchange rate. The coffee market provides a useful laboratory for pass-through since commodity costs account for a large fraction of marginal costs. I document both delayed and incomplete pass-through. Coffee roasters such as Folgers and Maxwell House adjust their prices infrequently--about 1.3 times per year. Almost all of the delays in pass-through occur at the wholesale level, so to the extent that price rigidity contributes to delayed pass-through it is wholesale prices that matter. I develop and estimate a structural model of pass-through with adjustment costs in prices for manufacturers. The model provides a quantitative explanation for both delayed and incomplete pass-through in this industry.

In the third chapter of my thesis, written jointly with Jón Steinsson, I study the implications of price rigidity for monetary non-neutrality. Most of the existing work on the implications of rigid prices for monetary policy analyzes models with identical firms. In this paper, we develop a multi-sector menu cost model and calibrate it to evidence from the BLS data set on the behavior of prices across sectors. We find that heterogeneity has first-order implications for the effects of monetary policy. We also consider the effects of allowing for intermediate inputs. Together, these factors raise the economy's response to monetary shocks by an order of magnitude, helping to reconcile the micro-evidence on price rigidity with the large estimated responses of real output to monetary shocks.