Price-setting behaviour, sectoral inflation dynamics and monetary policy

This dissertation analyses the micro and the macro facts on Switzerland’s consumer prices. Chapter 1 focuses on the micro facts and carries out a descriptive analysis on firms’ price-setting behvaviour. The statistics imply substantial heterogeneity among price setters especially regarding the frequency of price changes while the size of price changes does not vary greatly. Therefore, Chapter 2 attempts to explain the timing of price changes in more detail and assesses the relevance of current price-setting models. The empirical findings are consistent with recent menu-cost models which stress the role of time-varying heterogeneity and temporary price cuts for price setting. However, the findings do not allow to reconcile the micro facts with the macro facts. The remainder of the dissertation is therefore guided by the recent theoretical contributions which emphasise rational inattention, idiosyncratic disturbances, and sectoral heterogeneity. Using a factor-augmented vector autoregression, Chapter 3 disentangles disaggregate price fluctuations between idiosyncratic disturbances and a common component. Consistent with the micro facts, the sectoral responses to macroeconomic shocks are very heterogeneous. The implications of rational inattention, however, do not line up well with the empirical findings. Moreover, there is evidence that the sluggish response of inflation may, at least partly, be driven by the cost channel of monetary policy rather than price stickiness.