Changes in Australian Price-setting Behaviour Around a Large Shock: Evidence From Microdata

Speaker: Jonathan Hambur

Affiliation: Reserve Bank of Australia

Location: Room 104, Chamberlain Building (#35), St Lucia Campus

Zoom: https://uqz.zoom.us/j/89790507770 

Abstract: The sharp increase in inflation in the late-COVID-19 period has led to an increased focus on the dynamics of price-setting and how these may change in the face of large economic shocks. This has direct bearing on how price stickiness is treated in New Keynesian business cycle models. It also has important practical implications for central bank and economic policymakers, who need to exercise judgement about shifts in price dynamics in real time to meet inflation management objectives. We use a large dataset of web-scraped Australian retail prices to characterise shifts in firms’ price-setting behaviour between 2018 and 2023. We find evidence that price rigidity declined from 2022 when goods inflation was rising strongly. We assess the impact of observed shifts in price-setting on the pass-through of economic and monetary shocks to inflation in a DSGE setting. We find that failing to account for declines in price rigidity around large cost-push shocks leads to under-forecasting of inflation. We show that declines in rigidity reduce the trade-off between managing inflation and unemployment, enabling policymakers to respond more aggressively to inflationary shocks at minimal additional cost to the real economy.