Title: Belief-dependent pricing decisions
Authors: Serafin Frache - Universidad de Montevideo (Uruguay)
Rodrigo Lluberas - Banco Central del Uruguay (Uruguay) [presenting]
Javier Turen - PUC-Chile (Chile)
Abstract: The effects of inflation and idiosyncratic cost expectations on firms' price-adjusting decisions are studied. We explore a novel monthly survey data on firms' expectations in Uruguay. Through the survey, we can directly assess price-adjustment decisions with firms' expectations while controlling for time and state-dependent factors. While inflation expectations do not play any role in our results, firms' beliefs about an expected increase in their overall costs matter as they positively affect the probability of adjusting prices. The evidence is consistent with the presence of forward-looking pricing at the firm level. The expectation channel is, however, heterogeneous across firms and operates with a delay. We show that the effect is driven exclusively by large firms. Being the beliefs about costs more volatile than inflation, the null reaction to this later expectation is in line with the theoretical predictions of Rationally-Inattentive price-setters.