A State-Dependent Model of Intermediate Goods Pricing

Recent analyses of transaction-level data sets have generated new stylized facts on price setting and greatly in‡uenced the empirical openand closed-economy macroeconomics literatures. This work has uncovered marked heterogeneity in price stickiness, demonstrated that even non-zero price changes do not fully "pass through" exchange rate shocks, and o¤ered evidence of synchronization in the timing of price changes. Further, intra…rm prices have been shown to di¤er from arm’s length prices in each of these characteristics. This paper develops a state-dependent model of price setting by strategic intermediate goods producers that anticipate and respond to their competitors’actions. The model, which allows for both arm’s length and intra…rm transactions, is able to generate all of these empirical pricing patterns. University of Chicago, Booth School of Business, 5807 S Woodlawn Ave., Chicago, IL 60637, [email protected], (773) 834-3199 (phone), (773) 753-8266 (fax). I thank Gita Gopinath, Elhanan Helpman, Ken Rogo¤, Ariel Burstein, Steve Davis, Uli Doraszelski, Dan Frisch, Oleg Itskhoki, Virgiliu Midrigan, Emi Nakamura, Roberto Rigobon, Jon Steinsson, and Aleh Tsyvinski for very helpful discussions. I am grateful to Charles Engel, the editor, and two anonymous referees for their excellent comments and suggestions.